COMMENTARY 


ON  THE 


SCIENCE    OF    ORGANIZATION 


-AND 


BUSINESS    DEVELOPMENT 


ROBERT  J.  FRANK,  LL.  B. 
•\ 

OF  THE  CHICAGO  BAR 


REVISED  EDITION 


CHICAGO  COMMERCIAL  PUBLISHING  COMPANY 

CHICAGO 

1910 


COPYRIGHT    1907 

BY 
ROBERT  J.   FRANK 


COPYRIGHT    1909 

BY 
ROBERT  J.   FRANK 


COPYRIGHT    1910 

BY 
ROBERT  J.   FRANK 


PRESS  OP  CHICAGO  LBGAL  Naws  Co.,  CHICAGO. 


A   TREATISE 


ON  THE 


LAW  AND   SCIENCE 


OF  THE 

PROMOTION,    ORGANIZATION, 

REORGANIZATION  AND 

MANAGEMENT 

— OF — 

BUSINESS   CORPORATIONS 


WITH  SPECIAL  REFERENCE  TO   APPROVED 
PLANS    AND     PROCEDURE     FOR    THE 
FINANCING  OF  MODERN  BUSI- 
NESS     ENTERPRISES 


OF  THE 

UNIVERSITY 

OF 


"Science  Is  nothing  but  trained  and  organized  Common  Sense,  differing 
from  the  latter  only  as  a  Veteran  may  from  a  raw  recruit,  and  Its  Methods 
differ  from  those  of  Common  Sense,  only  as  the  guardsman's  cut  and  thrust 
differ  from  the  Manner  in  which  a  Savage  Wields  his  Club." 

HDXLBY. 


AUTHOR'S  NOTE. 

Almost  immediately  after  the  first  edition  of  this 
book  appeared,  a  money  panic  suddenly  overwhelmed 
the  country,  the  cause  of  which  may  be  directly 
attributed  to  the  faulty  methods  heretofore  adopted  in 
the  organization,  reorganization  or  financing  of  busi- 
ness enterprises,  and  incidentally  many  of  the  prin- 
ciples herein  contended  for  have  thereby  been  vindi- 
cated, and  demonstrated  to  be  sound  and  practical. 

In  the  present  volume  a  number  of  minor  corrections, 
some  omissions,  and  numerous  important  additions 
have  been  made,  so  that  the  original  purposes  may  now 
be  considered  as  accomplished — namely  to  present  in 
a  brief  and  concise  form,  a  general  statement  of  the 
important  practical  questions  relating  to  business 
organization  and  the  well-settled  legal  principles 
necessary  for  a  proper  application  of  the  various 
plans  and  modes  of  procedure  discussed. 

The  generous  reception  the  first  edition  enjoyed  has 
encouraged  the  author  in  the  belief  that  this  volume 
has  served  a  useful  purpose. 

EGBERT  J.  FKANK. 
Chicago,  October,  1909. 


CONTENTS 

INTRODUCTORY. 

CHAPTER  I. 

ORGANIZATION. 

A  Common  Error. 

The  Corporation  and  Its  Advantages. 
How  to  Organize  a  Corporation. 
Where  to  Organize. 

CHAPTER  II. 

CORPORATE  FINANCING. 

Capital,  Bonds  and  Stocks. 

Capitalization  of  Corporations. 

Raising  of  Additional  Capital. 

Transferring  of  An  Established  Business  to  a  Corporation. 


CHAPTER 

CORPORATE  MANAGEMENT. 

Directors,  Officers  —  Their  Duties  and  Liabilities. 
Stockholders'  Rights  and  Liabilities. 
By-Laws  and  Their  Uses. 
Corporate  Records  and  Books  of  Account. 
Examination  of  Books  and  Records. 


8  CONTENTS. 

CHAPTER  IV. 

REORGANIZATION   AND   CONSOLIDATION   OF   ENTERPRISE& 

Reorganization — Possible  Advantages  Therefrom. 

Consolidation  of  Enterprises. 

Stock-Jobbing. 

CHAPTER  V. 

PROMOTION  OF  ENTERPRISES. 

Promoters. 

Promotion  Contracts. 

Good  Will— Trademarks  and  Trade  Names. 

Patents  and  Their  Commercial  Value. 

Mining  Enterprises. 

APPENDIX. 

Containing  General  and  Special  Forms  of  Contracts,  Reorganiza- 
tion and  Installment  Certificates,  By-Laws,  Resolutions,  etc.;  also 
a  synopsis  of  the  Corporation  Laws  of  favorite  States  for  incorpo- 
rating, rules  for  Listing  Stocks  and  Bonds,  forms  of  Option  Con- 
tracts, table  showing  the  Earnings  of  Stocks  and  Bonds,  and  other 
special  matter  relating  to  the  above  subjects. 

(See  TABLE  OF  CONTENTS,  PAGE  187.) 


INTRODUCTORY 


INTRODUCTORY 

Before  the  advent  of  the  corporation,  or  before  the 
almost  universal  adoption  of  that  form  of  conducting 
business,  those  responsible  for  the  success  or  failure 
of  an  enterprise  were  principally  concerned  about  its 
details.  Now  such  details  are  delegated  to  subordi- 
nates, and  the  actual  head  of  the  enterprise  is  more 
intimately  concerned  with  its  policy  and  its  financial 
plans  and  general  undertakings.^ 

It  has  been  said  that  the  type  of  man  who  has 
genius  for  acquiring  exact  technical  knowledge  is  not 
ordinarily  a  successful  executive,  and  the  accuracy  of 
this  statement  must,  in  a  measure,  be  admitted;  but 
it  must  also  appear  to  those  familiar  with  present  con- 
ditions that  the  successful  executive  not  only  neces- 
sarily possesses  an  intimate  general  knowledge  of  the 
science  pertaining  to  the  particular  enterprise  under 
his  control,  but  an  equal  general  knowledge  of  the 
established  rules  concerning  corporate  organization 
and  finance,  and  the  elementary  rights  of  stockholders, 
as  well  as  the  duties  and  responsibilities  of  corporate 
officers. 

It  is  clearly  beyond  the  possibility  or  legitimate  pur- 


12  INTRODUCTORY. 

poses  of  any  book  to  attempt  to  so  qualify  its  readers 
as  to  enable  them  to  dispense  with  the  services  of  the 
legal  profession;  but  it  is  possible  to  give  such  a 
general  announcement  of  the  law  and  approved 
procedure  pertaining  to  corporate  organization  and 
financing — and  particularly  the  practical  features 
relating  thereto — as  will  be  of  inestimable  value  to 
those  charged  with  the  responsibilities  of  such  under- 
takings, and  at  the  same  time  suggest  to  the  practicing 
lawyer  who  has  not  specialized  along  those  lines  the 
important  practical  questions  which  inevitably  arise 
for  consideration  in  the  course  of  such  employment. 

Particularly  is  this  true  concerning  the  reorganiza- 
tion of  a  business  enterprise  where  the  adoption  of 
corporate  plans  for  its  conduct  is  concerned.  In- 
numerable questions  there  arise  which  ordinarily  do 
not  receive  the  attention  they  deserve  on  account  of 
their  far-reaching  effect  upon  the  success  or  failure 
of  the  enterprise,  or  upon  the  rights  of  the  individuals 
interested  therein. 

The  contents  of  this  volume  may  properly  be  termed 
a  discussion  of  the  middle  ground  between  what  has 
ordinarily  heretofore  been  considered  within  the  em- 
ployment and  province  of  the  lawyer — who  is  called 
upon  to  create  the  corporate  entity  which  is  to  con- 
duct a  new  enterprise,  or  to  take  over  the  property 
of  or  reorganize  an  old  one — and  what  might,  with 
equal  propriety,  be  considered  within  the  province  of 


INTRODUCTORY.  13 

the  promoter  01  the  individuals  interested  in  such 
undertaking. 

Every  mistake  in  the  organization  of  a  business 
corporation  discloses  ample  evidence  of  either  lack 
of  proper  knowledge  of  the  questions  constituting 
the  middle-ground  referred  to,  or  (what  is  equally  as 
disastrous  to  the  enterprise)  the  failure  to  put  such 
knowledge  into  execution;  and  this  might,  and  often 
does  arise  on  account  of  the  fact  that  the  employment 
of  or  instructions  given  the  corporation  attorney  have 
been  limited  to  simply  complying  with  the  statutory 
formalities  in  the  creation  of  the  corporate  entity. 

Strictly  speaking,  the  lawyer's  duty  is  discharged 
by  simply  complying  with  the  instructions  of  his  client, 
be  they  ever  so  faulty;  and  the  client  is  rarely  ever 
qualified  to  decide  for  himself  the  most  important 
preliminary  questions  that  arise  when  the  first  steps 
are  to  be  taken  in  launching  a  modern  business 
venture,  namely :  the  creation  of  the  corporation  which 
is  to  own  and  conduct  it.  Its  purpose,  capitalization 
and  financial  plans,  adequate  protection  for  investors 
or  the  owners  of  property  to  be  conveyed,  and  rules 
for  internal  conduct,  etc.,  are  each  and  all  matters  of 
first  importance,  either  immediately  or  at  some  future 
period  of  development;  and  these  and  other  questions 
of  like  significance  are  not  met  with  inevery-day  affairs 
of  business  life,  and  rarely  in  the  general  practice  of 
the  law. 


14  INTKODUCTOBY. 

A  careful  examination  of  all  the  works  on  corpora- 
tion law  now  in  existence  fails  to  disclose  any  adequate 
discussion  of  the  field  alluded  to  above;  and  this,  per- 
haps, on  account  of  the  difficulty  attending  such  a 
venture,  owing  to  the  great  variety  of  conditions 
which  are  encountered  in  actual  practice,  and  the 
almost  hopeless  task  of  attempting  to  cover  such  field 
in  any  satisfactory  manner.  But  it  is  believed  that  a 
brief  and  concise  announcement  of  the  general  prin- 
ciples covering  the  practical  questions  referred  to, 
(which  have  been  established  by  precedent  as  practical) 
and  an  equally  general  discussion  of  the  law  relating 
thereto,  must  necessarily  be  of  value,  particularly  to 
the  student  or  executive  who  is  desirous  of  acquiring 
a  knowledge  along  such  lines,  and  who  is  not  inclined 
or  able  to  devote  the  time  necessary  to  an  extended 
research,  much  less  to  acquire  the  experience  neces- 
sary to  apply  such  knowledge  once  it  is  obtained. 

It  may  appear  to  those  who  simply  review  the  con- 
tents of  this  volume,  or  who  are  unfamiliar  with  its 
purpose,  that  the  arrangement  of  the  subjects  are 
somewhat  unsystematic,  and  that  it  discusses  only 
legal  questions  generally.  It  is  to  be  hoped,  however, 
that,  upon  a  more  careful  study  of  the  volume  as  a 
ivhole,  the  connection  and  continuity  will  be  disclosed, 
and  the  fact  appreciated  that  a  general,  rather  than 
a  particular  discussion  of  the  subjects  in  hand  is  more 
to  be  desired — as  being  of  greater  practical  value, — 
than  an  extended  discussion  of  details  involving  cir- 
cumstances or  conditions  which  may  never  be  met  in 
actual  business  life. 


INTEODUCTOKY.  15 

The  illustrations  given  in  the  Appendix  are  intended 
to  supplement  and  explain  certain  important  state- 
ments or  plans  referred  to  in  the  text,  and  at  the 
same  time  serve  as  suggestions  for  adaptation  by  the 
Profession. 

In  every  work  of  this  character  many  questions, 
often  considered  elementary,  are  necessarily  discussed, 
for  the  reason  that  every  book  treating  on  any  science 
must  anticipate  that  such  a  work  will  more  often  fall 
into  the  hands  of  those  unfamiliar  with  such  questions 
than  otherwise. 

The  use  of  technical  language  has  purposely  been 
avoided,  and  no  attempt  has  been  made  to  substantiate 
any  principle  of  law  laid  down  by  citations  of  adjudi- 
cated cases  or  authorities,  but  careful  reference  has 
been  had  to  all  the  leading  works  on  corporation  law, 
and  the  laws  of  the  various  States,  as  well  as  to  numer- 
ous adjudicated  cases  which  were  deemed  necessary  to 
insure  the  accuracy  and  reliability  of  the  legal  princi- 
ples herein  stated. 


ORGANIZATION 


CHAPTEE  I. 

ORGANIZATION. 
A  COMMON  ERBOB. 

THE   CORPOBATION   AND   ITS   ADVANTAGES. 

How  TO  OKGANIZE  A  COBPOBATION. 
WHEBE  TO  ORGANIZE. 

A  com-  Every  business  has  peculiarities  and 
mon  Error,  mysteries  that  cannot  be  solved  by  intu- 
ition, and  the  controlling  elements  that  make  for  suc- 
cess (when  recognized  at  all)  are  often  the  result  of 
the  accidental  occurrence  of  circumstances  rather  than 
the  result  of  any  pre-conceived  plan.  But  there  are 
elements  which  lead  to  certain  failure,  and  they  may, 
in  most  cases,  be  "seen  from  afar"  and  avoided  by 
seasonable  consideration. 

More  money  has  often  been  made  or  lost  through 
the  plans  adopted  for  financing,  organizing  or  re- 
organizing a  business  than  in  its  operation ;  at  the  same 
time  mistakes  in  such  plans  often  prevent  well-merited 
success  or  occasion  individual  sacrifice. 

There  is  often  a  tendency  in  the  selection  and  pro- 
motion of  a  new  enterprise  to  look  primarily,  and 
almost  exclusively,  to  the  "  opportunities "  of  the  busi- 


20  A  COMMON  ERROR. 

ness,  and  to  disregard  the  equally  important  questions 
concerning  the  formation,  or  methods  to  be  adopted 
for  its  successful  conduct. 

Experience  has  demonstrated  that  a  business  oppor- 
tunity, otherwise  promising,  may  be  unsuccessful 
without  a  proper  basis  for  operation,  or  executive 
ability  behind  it  to  organize  the  details  and  properly 
conduct  such  a  business. 

To  err  in  the  inception  of  a  business  undertaking, 
in  its  organization,  or  in  some  apparently  minor 
detail,  may  mean  a  handicap  throughout;  and  the 
consequences  of  faulty  formation,  or  errors  of  judg- 
ment are  rarely  discovered  until  experience  has 
pointed  them  out,  and  frequently,  after  it  is  too  late 
to  remedy  them.  Then,  it  is  but  natural  to  refuse 
to  see  or  admit  such  mistakes  after  they  are  once 
made,  and  to  proceed  upon  a  theory  that  has  proven 
to  be  erroneous  or  without  the  promise  of  ultimate 
financial  reward. 

Individually,  serious  losses  of  both  money  and 
property  frequently  occur  through  manipulations  in 
the  coalition  or  reorganization  of  business  enterprises ; 
and  opportunities  for  permanent  and  advantageous 
salaried  connection  with  a  consolidating  organization 
are  as  often  forfeited  for  lack  of  adequate  protection 
for  those  entitled  thereto. 

There  are  no  undertakings  in  business  affairs  where 
so  many  opportunities  for  the  exercise  of  skill  and 


THE  CORPORATION  AND  ITS  ADVANTAGES.  21 

experience  are  presented,  and  where  the  same  are  so 
essential  to  success,  as  in  the  construction  of  a  new, 
or  the  re-adjustment  of  the  affairs  of  an  established 
business — such  as  the  devising  of  practical  and  advan- 
tageous plans  for  the  securing  of  additional  capital, 
or  a  regeneration  of  its  vitality. 

The  business  with  a  proper  foundation  is  at  least 
one-third  a  success;  the  other  two-thirds  may  usually 
be  acquired  by  opportunity,  and  proper  and  adequate 
facilities. 


The   Supreme   Court   of   the   United 

The     Cor- 
poration and     States  has  said  that  "  Private  corpora- 
its  Advan-     tions  are  but  associations  of  individuals 
united  for  some  common  purpose,  and 
permitted  by  the  law  to  use  a  common  name,  and 
to   change   its   members   without   dissolution   of   the 
association.''     And  also,  "A  corporation  is  an  arti- 
ficial person   created  by  law  as   the  representative 
of  those  persons,  natural  or  artificial,  who  contribute 
to,   or   become   holders    of    shares    in   the   property 
entrusted  to  it  for  a  common  purpose.    As  it  is  the 
creature  of  positive  law,  its  rights,  powers  and  duties 
are  prescribed  by  the  law." 

The  legitimate  purposes  of  the  corporation  are  to 
provide  a  modern  system  for  the  conduct  of  business,  to 


22  THE  CORPOKATION  AND  ITS  ADVANTAGES. 

enable  two  or  more  individuals  to  combine  their  capi- 
tal and  efforts  in  the  accomplishment  of  a  common 
purpose,  and  also  to  obviate  the  risks  and  many  other 
disadvantages  of  the  obsolete  co-partnership  and  pri- 
vate ownership  of  enterprises. 

The  fact  that  great  fortunes  have  been  amassed  and 
"  trusts "  created  through  this  modern  system  simply 
demonstrates  the  weakness  in  the  laws  of  the  various 
States  where  such  organizations  have  their  existence 
and  domicile,  and  should  not  militate  against  the  plan 
itself. 

The  legitimate  advantages  of  incorporating  a  busi- 
ness are  many  and  varied.  It  is  impractical  to  attempt 
to  enumerate  all,  or  any  considerable  number  of  them. 
Among  the  most  prominent,  however,  are  the  follow- 
ing:— 

It  exclusively  perpetuates  any  trade  name,  and  inci- 
dentally the  good  will  attached  thereto. 

It  eliminates  the  dangers  of  personal  liability  be- 
yond the  money  originally  invested  which  attaches  to 
any  business  conducted  by  an  individual  or  co-part- 
nership. 

It  enables  the  organizer  to  engage  in  different  pur- 
suits, to  more  successfully  conduct  an  enterprise,  or 
enlarge  the  same,  with  a  limited  amount  of  individual 
capital. 

Upon  the  death  of  a  stockholder,  or  disagreement, 


THE    COKPOBATION    AND    ITS    ADVANTAGES.  23 

or  separation  of  the  management,  the  business  is  not 
necessarily  hampered  or  interrupted,  and  the  transfer 
of  the  individual  interest  of  any  stockholder  is  sim- 
plified, and  its  value  readily  determined. 

The  capital  invested  can  be  increased  at  any  time  to 
admit  of  expanding  the  business,  or  to  enable  compet- 
ing enterprises  to  join  forces,  without  disadvantage 
to  either. 

Employes  or  customers  may  be  permitted  to  become 
interested  in  the  enterprise  without  the  danger  of  dis- 
solution or  other  possible  objectionable  entanglements 
which  almost  invariably  occur  through  disagreement 
of  co-partners. 

Any  stockholder  may  pledge  his  individual  stock  to 
obtain  individual  accommodation  without  jeopardiz- 
ing the  interests  of  the  corporation,  which  cannot  be 
done  by  a  partner  in  a  co-partnership;  besides,  the 
individual  debts  or  personal  entanglements  of  any 
stockholder  will  not  interfere  with  the  existence  or 
standing  of  the  corporation. 

Then,  the  advantages  of  the  individual  stockholder 
of  raising  funds  upon  his  individual  interest  in  an 
enterprise  (stock)  over  that  of  any  other  form  of  per- 
sonal property  is  apparent. 

In  the  majority  of  cases  a  business  may  be  sold  out- 
right to  a  much  better  advantage  by  first  incorporat- 
ing it.  It  is  less  difficult  to  find  a  number  of  persons 


24  HOW  TO  OKGANIZE  A  COKPORATION. 

who  would  take  stock  in  a  company  that  owned  an 
attractive  business  than  to  find  an  individual  who 
could  purchase  the  whole;  and  besides,  the  value  of 
the  Good  Will  can  be,  in  this  way,  preserved  and  real- 
ized upon,  and  the  price  of  the  business  fixed  by  the 
owner  before  it  is  offered  for  sale. 

Probably  the  most  important  of  all  the  advantages 
are  the  opportunities  which  are  possible  to  the  re- 
sourceful individual,  and  which  present  themselves  in 
almost  every  undertaking,  and  they  depend  entirely 
upon  the  skill,  ability  and  experience  of  the  organizer 
of  the  particular  corporation. 


How    to        It  is  frequently  difficult  to  appreciate 
organize    a     or  remember  that  a  corporation  is  an 
corporation,     artificial  being,  and  exists  independently 
of  the  stockholders  or  persons  interested  in  it.     By 
comprehending  and  bearing  this  fact  in  mind,  all  ques- 
tions relating  to  a  corporate  existence  are  simplified. 
These  artificial  beings,  "invisible  and  intangible, ' ' 
are  created  only  by  legislative  enactment.     Most  of 
the  States,  however,  have  what  is  termed  "General 
Acts,"  which  means  that  the  Legislatures  of  these 
States  have  prescribed  methods  of  creating  corporate 
bodies,  and  have  delegated  to  a  certain  State  official, 


HOW  TO  ORGANIZE  A  CORPORATION.  25 

or  officials,  certain  powers  and  duties  which  relieve 
the  applicant  for  corporate  license  from  the  delays 
and  other  difficulties  incident  to  direct  application  to 
the  Legislature  itself. 

Illinois,  for  instance,  has  such  a  " General  Act," 
passed  in  1872,  and  amended  from  time  to  time  since 
its  passage.  In  discussing  and  illustrating  the  mode 
of  organizing  a  corporation,  the  " General  Act"  of 
Illinois  will  be  here  followed,  and  its  provisions  com- 
plied with. 

The  first  step  in  the  organization  of  a  business  cor- 
poration is  the  determination  by  the  parties  to  be 
interested  therein  upon  some  definite  object  to  be 
accomplished;  that  involves  the  important  question  of 
business  policy,  which  clients  are  usually  expected  to 
solve  for  themselves. 

For  convenience,  the  advantages  of  incorporating 
have  been  treated  under  the  preceding  head ;  for  it  is 
important  to  understand  such  advantages  in  connec- 
tion with  the  purposes  in  view.  In  fact,  the  contents 
of  this  book  are  especially  intended  to  be  helpful  in 
determining  these  and  other  important  practical  ques- 
tions, and  the  principal  purpose  thereof  is  to  supply 
such  information  as  is  otherwise  inaccessible,  and  it 
will  be  necessary  to  refer  to  the  various  headings  for 
a  full  explanation  and  discussion  on  the  questions  here 
suggested. 


26  HOW  TO  ORGANIZE  A  CORPORATION. 

After  the  objects  which  it  is  desired  to  obtain  have 
been  agreed  upon  and  formulated,  the  next  step  is  to 
apply  to  the  Secretary  of  State  for  a  "license  to  open 
books  of  subscription  to  the  capital  stock, "  etc.,  and 
for  the  appointment  of  commissioners  to  complete  the 
organization.  This  application  sets  forth  the  corpor- 
ate name  selected;  the  objects  for  which  the  cor- 
poration is  to  be  formed;  the  amount  of  capital  stock; 
the  amount  of  each  share;  the  number  of  shares;  the 
location  of  the  corporation,  and  its  duration  of  cor- 
porate life. 

In  selecting  the  corporate  name,  reference  should 
be  had  to  the  business  contemplated,  if  this  is  feasible, 
and  the  name  should  be  as  short  and  euphonious  as 
possible.  The  retention  of  an  established  trade  name 
is  always  desirable,  and  can  usually  be  accomplished 
without  difficulty. 

Care  should  be  exercised  in  avoiding  the  selection 
of  the  name  of  a  corporation  in  existence,  either  in  the 
State  where  the  charter  is  obtained,  or  elsewhere,  for 
under  the  recent  law  of  "Unfair  Competition, "  now 
recognized  by  all  courts,  it  has  been  held  that  an  in- 
junction would  lie  to  restrain  the  use  of  a  corporate 
name  so  similar  to  one  already  in  existence  that  it 
would  create  confusion  in  trade,  and  otherwise  be 
injurious  to  the  business  of  the  company  having  a 
prior  corporate  existence. 


HOW  TO  OKGANIZE  A  COEPOKATION.  27 

The  objects  of  the  corporation  are,  perhaps,  the 
most  important  rights  to  be  protected  in  the  formation 
of  a  corporation,  for  they  frequently  give  the  incor- 
porators  many  advantages  in  the  development  of  the 
business.  While  it  is  always  desirable  to  make  the 
objects  contemplated  as  broad  as  possible,  this  may 
be  overdone,  and  under  the  present  Illinois  statutes 
it  is  necessary  to  limit  the  objects  of  the  corporation; 
besides,  the  doing  of  business  ultra  vires  (outside  the 
scope  of  the  objects  set  forth  in  the  application)  is 
unlawful,  and  may  result  in  loss  to  the  company  and 
lead  to  other  complications. 

Determining  the  amount  of  capital  stock  is  treated 
under  a  separate  heading.* 

The  amount  of  the  shares  must  not  be  less  than 
$10,  nor  more  than  $100  in  the  State  of  Illinois.  As 
to  the  duration  of  the  existence  of  the  corporation, 
this  may  be  made  the  safeguard  or  otherwise  of  the 
rights  of  the  parties;  that  is,  if  it  is  desired  to  con- 
duct the  enterprise  for  a  limited  time,  that  fact  can  be 
set  forth  in  the  application,  and,  in  consequence,  the 
corporation's  life  will  end  upon  the  termination  of  the 
time  limit  thus  set  forth.  This  means  that  the  affairs 
of  the  corporation  must  be  wound  up  at  that  time, 
regardless  of  the  wishes  of  the  stockholders,  and  with- 
out any  further  action  being  taken  by  them. 

•"Capitalization  of  Corporations,"  page  51. 


28  HOW  TO  ORGANIZE  A  CORPORATION. 

On  the  other  hand,  if  it  is  not  desired  to  have  a  lim- 
ited undertaking,  the  duration  of  the  corporation 
should  be  ninety-nine  years  (the  tune  limit  in  Illinois), 
for  one  of  the  chief  assets  of  a  business  is  its  trade 
name,  and  this  should  be  more  valuable  each  succeed- 
ing year. 

Upon  the  receipt  of  the  application,  properly  exe- 
cuted, the  Secretary  of  State  issues  what  is  termed  a 
"license  to  open  books  of  subscription. "  This  instru- 
ment empowers  the  parties  named  therein  to  complete 
the  organization — that  is,  to  have  the  stock  subscribed 
for  according  to  law,  and  to  give  notices,  under  the 
statute,  to  parties  subscribing  for  such  stock,  of  the 
holding  of  a  meeting  to  elect  directors,  etc.  The  stat- 
utes provide  that  the  notice  for  the  holding  of  the 
first  meeting  must  be  mailed  to  all  subscribers  to  the 
capital  stock  at  least  ten  days  prior  to  the  meeting 
day,  as  determined  by  the  commissioners  and  sub- 
scribers, and  set  forth  in  the  notice  referred  to. 

There  is  now  a  custom  among  many  incorporators 
of  formally  waiving  the  statutory  notice  above  re- 
ferred to,  and  of  holding  the  first  meeting,  to  organize, 
immediately  upon  receipt  of  the  license  from  the 
Secretary  of  State.  The  question  of  the  legality  of  so 
doing  was  submitted  to  the  Supreme  Court  of  Illinois 
in  1906  and  the  court  held  that  "the  only  persons 
interested  in  the  result  to  be  obtained  by  giving  notice 


HOW  TO  ORGANIZE  A  CORPORATION.          29 

of  the  object,  time  and  place  of  a  meeting  of  the  sub- 
scribers to  the  Capital  Stock  of  a  corporation  for  the 
purposes  specified  in  the  statutes  are  the  subscribers 
themselves, "  and  that,  therefore,  if  all  the  subscribers 
join  in  such  waiver  of  notice,  and  the  meeting  to 
organize  is  actually  held  in  accordance  with  such 
waiver,  the  purpose  of  the  statute  has  thereby  been 
accomplished. 

In  pursuing  this  method  of  completing  the  organiza- 
tion of  a  corporation,  the  waiver  of  notice  should  be 
entered  in  the  Minute  Book  of  the  corporation,  and 
bear  the  original  signatures  of  all  the  subscribers. 

Under  the  present  state  of  our  "General  Act"  it 
makes  it  necessary  for  the  commissioners  named  in 
the  license  referred  to,  to  take  over,  as  such  commis- 
sioners and  trustees,  for  the  new  corporation  when 
formed,  any  property  which  it  is  contemplated  shall 
be  transferred  to  the  new  corporation,  and  this,  of 
course,  includes  the  payment  of  money,  which,  under 
the  present  act,  is  required  to  be  done  on  or  before  the 
meeting  called  by  the  notice  above  described,  to  the 
extent  of  50  percent  of  the  capital  stock ;  that  is,  one- 
half  of  the  capital  stock  must  now  be  paid  to  the  com- 
missioners in  advance  of  complete  organization  of 
every  business  corporation. 

Great  care  must  be  exercised  in  the  accepting  of 
property  in  payment  for  capital  stock  by  the  commis- 


30  HOW  TO  OBGANIZE  A  COBPOBATION. 

sioners  in  question,  or  they  assume  a  liability  which 
they  may  not  contemplate,  or  intend  to  assume. 

In  the  Appendix  will  be  found  a  copy  of  a  resolu- 
tion which  it  is  considered  covers  this  question  in  a 
practical  way,*  and  the  subject  of  taking  over  assets 
other  than  cash  in  payment  of  stock  in  a  new  corpora- 
tion is  treated  at  length  hereinafter.! 

Appraisals  of  property  to  be  taken  in  payment  for 
stock  are  always  advisable,  if  not  necessary,  both  by 
the  commissioners  and  directors  when  elected,  and  as 
to  the  valuation  of  such  property,  that  is  also  treated 
hereinafter.! 

Separate  minutes  of  the  acceptance  and  appraisal 
of  property  by  the  commissioners  should  be  entered 
in  the  Minute  Book  for  their  own  protection,  and  as 
a  basis  for  a  resolution,  by  the  directors,  taking  over 
the  property  from  such  commissioners,  after  the  cor- 
poration is  formed. 

Upon  the  meeting  day  of  the  subscribers  to  the 
capital  stock,  set  forth  in  the  notice  referred  to,  the 
usual  formalities  should  be  observed  in  all  particulars, 
in  the  holding  of  the  first  meeting  and  transaction 
of  business  thereat,  and  the  minutes  should  be  pre- 
served and  recorded  in  the  Minute  Book  of  the  cor- 
poration, and  signed  by  the  parties  in  interest,  if  they 

•Appendix,    page  209. 

t "Transferring  of  An  Established  Business  to  a  Corporation,"  page  69. 


HOW  TO  ORGANIZE  A  CORPORATION.  31 

are  not  too  numerous;  at  any  rate,  they  should  be 
signed  by  the  commissioners,  and  attested  by  the  secre- 
tary. 

At  this  meeting,  the  subscribers  to  the  capital 
stock  elect  the  first  Board  of  Directors,  and  this  is 
important  in  relation  to  the  future  management  and 
control  of  the  corporation,  for  the  ensuing  year,  at 
least ;  for  it  must  be  borne  in  mind  that  the  directors 
control  the  offices  of  the  corporation,  and  not  the  stock- 
holders, and  that  the  officers  in  turn  transact  the  busi- 
ness of  the  corporation. 

The  Statutes  of  Illinois  relating  to  directors  pro- 
vide that  the  number  of  directors  shall  be  fixed  at 
the  first  meeting  of  the  subscribers,  and  their  number 
depends  wholly  upon  the  will  of  the  incorporators. 
Such  subscribers  may,  if  they  see  fit,  by  resolution, 
divide  the  Board  of  Directors  into  three  classes;  the 
term  of  office  of  the  first  class  expiring  on  the  date  of 
the  annual  election  of  the  company  then  next  ensuing ; 
the  second  class  one  year  thereafter,  and  the  third 
class  two  years  thereafter.  Thus,  at  each  annual  elec- 
tion for  directors  after  such  classification,  the  stock- 
holders elect,  for  the  term  of  three  years,  the  number 
of  directors  constituting  such  class  whose  term  then 
expires.  In  this  way,  one  or  more  directors  will  hold 
office  from  the  beginning  of  the  organization  for  three 
years,  others  for  two  years,  and  still  others  for  one 


32  HOW   TO   ORGANIZE  A   CORPORATION. 

year,  if  for  any  reason  this  plan  be  advisable,  as  it 
frequently  is  in  large  corporations.  The  usual  plan, 
however,  is  to  elect  the  entire  Board  of  Directors  for 
a  period  of  one  year,  particularly  in  small  or  close  cor- 
porations. 

We  now  have  (at  least)  three  commissioners  hold- 
ing the  title  to  the  property  or  funds  of  the  corpora- 
tion in  process  of  formation,  which  have  been  turned 
over  to  them  in  accordance  with  the  law,  and  all  neces- 
sary steps  have  thus  far  been  taken,  including  the 
election  of  the  first  Board  of  Directors,  and  the  record- 
ing of  the  minutes  thereof  in  the  Minute  Book. 

A  report  in  due  form  of  these  proceedings  is  now 
prepared  and  forwarded  to  the  Secretary  of  State, 
and  upon  its  receipt  (if  in  all  things  it  complies  with 
the  law  and  the  original  application)  a  certificate  of 
complete  organization  is  issued  and  forwarded  to  the 
commissioners,  who  should  at  once  record  the  same  in 
the  office  of  the  Eecorder  of  Deeds  of  the  county  where 
the  principal  office  of  the  corporation  is  located;  for 
this  is  a  condition  precedent  to  the  corporate  life  of 
the  company,  or  its  right  to  transact  any  other  busi- 
ness than  that  already  explained. 

The  next  step  is  the  adoption  of  a  code  of  by-laws 
for  the  government  of  the  company,  and  it  is  well  to 
remember  that  the  by-laws  are  the  internal  laws  of 
the  corporation,  and  as  such  should  set  forth  the  rules 


HOW   TO   OKGANIZB  A  COKPORATION.  33 

necessary  for  the  proper  conduct  of  the  business.  This 
has  been  made  the  subject  of  separate  discussion,* 
and,  therefore,  need  not  be  further  alluded  to  at  this 
time. 

While  it  is  impossible  to  prepare  " stock  by-laws" 
that  will  meet  all  the  requirements  of  incorporators 
generally,  still  the  form  given  in  the  Appendix  heretof 
will  be  found  to  be  adaptable,  with  minor  changes,  to 
the  ordinary  business  corporation  organized  under  the 
laws  of  Illinois. 

After  the  adoption  of  a  set  of  by-laws  for  the  gov- 
ernment of  the  corporation,  the  next  step  to  be  taken 
is  the  election  of  officers,  and  they  will  be  such  as  the 
by-laws  have  provided  for.  The  laws  of  Illinois 
require  every  business  corporation  to  have  a  Presi- 
dent, a  Secretary  and  a  Treasurer;  and  leaves  it  dis- 
cretionary with  the  directors  as  to  how  many  addi- 
tional offices  they  shall  create. 

After  the  election  of  officers,  if  assets  have  been 
turned  over  to  the  commissioners,  to  be  applied  upon 
the  payment  of  stock  subscriptions,  the  Board  of 
Directors  then  proceed  to  appraise  and  take  over  the 
same  (if  it  be  property),  and  to  approve  or  disapprove 
of  the  action  of  the  commissioners  in  this  regard. 
There  is  no  direction  in  the  law  for  the  carrying  out 
of  its  provisions  under  which  advance  payments  are 

*  By-Laws  and  Their  Uses,"  page  94.  |  Appendix,  page  217. 


34  HOW   TO   ORGANIZE  A  CORPORATION. 

required,  except  that  they  shall  be  paid.  It  is  mani- 
fest, however,  that  inasmuch  as  the  corporation 
contemplated  is  not  yet  in  existence,  the  commissioners 
are  the  only  proper  persons  to  take  title  to  property, 
or  to  receive  advance  payments  on  account  of  stock 
subscriptions ;  and  for  that  purpose,  they  stand  in  the 
relation  of  trustees  for  the  new  corporation  when 
formed. 

The  approved  method  of  taking  over  property  or 
advance  payments  made  by  the  stockholders  to  the  com- 
missioners, in  advance  of  complete  organization,  is 
for  the  Board  of  Directors,  by  proper  resolution,  to 
ratify,  confirm  and  adopt  the  acts  of  the  commission- 
ers in  this  behalf,  if  such  acts  are  in  fact  proper  and 
deemed  for  the  best  interest  of  the  corporation.  A 
form  of  resolution  applicable  for  this  purpose  may 
be  found  in  the  Appendix,*  and  will  serve  as  a  guide 
to  what  is  usual  under  the  circumstances  here  indi- 
cated. 

The  rules  relating  to  the  valuation,  appraisal  and 
purchase  of  assets  by  a  new  corporation  are  further, 
and  at  length,  discussed  under  the  title,  "Transfer- 
ring of  An  Established  Business  to  a  Corporation,  "f 

After  the  foregoing  steps  have  been  taken,  and  the 
minutes  of  the  various  meetings  written  up  in  the 
Corporate  Eecord  Book,  the  ordinary  business  cor- 

*  Appendix,  page  209.  tPage  69. 


HOW   TO   ORGANIZE  A  CORPORATION.  35 

poration  is  in  existence,  fully  organized  and  ready  for 
the  transaction  of  any  business  for  which  it  was 
incorporated. 

The  question  of  "how  to  create  the  corporate  entity 
before  the  principal  capital  becomes  interested "  fre- 
quently arises.  Particularly  is  this  so  where  the  incor- 
porators  have  a  limited  amount  of  capital,  or  the  cor- 
poration is  being  created  for  the  purpose  of  taking 
over  a  business  already  established,  or  for  reorganiza- 
tion purposes,  and  the  details  of  such  undertaking 
have  not  been  entirely  settled.  In  such  a  case  it  is 
possible  to  accomplish  the  object,  and  fully  comply 
with  the  law  requiring  50  percent  of  the  capital  stock 
to  be  paid  in  before  complete  organization,  etc.,  by 
first  incorporating  with  a  nominal  capitalization,  and 
afterward  raising  the  capital  stock  to  the  amount 
originally  contemplated  or  desired. 

The  Corporation  Laws  of  the  various  States  differ 
somewhat  materially  in  the  manner  and  form  of  creat- 
ing a  corporation,  and  it  is  beyond  the  scope  of  this 
book  to  undertake  to  discuss  the  details  of  the  various 
acts;  the  formalities  required  for  their  compliance 
must  necessarily  be  entrusted  to  those  familiar  with 
such  laws  as  they  exist  at  the  time  of  organization; 
but  the  essential  practical  features  of  the  organization 
of  business  corporations  are  much  the  same  every- 
where, and  they  are  discussed  under  the  various  head- 
ings herein. 


36  WHERE  TO  OEGANIZE. 

where  to        Like  most  questions  of  procedure,  this 

organize.  is  one  depending  largely  upon  the  cir- 
cumstances of  each  individual  case.  There  are  no 
general  rules  which  can  be  applied  when  the  ultimate 
success  of  the  enterprise  is  considered. 

So  far  as  the  most  favorable  laws  are  concerned, 
that  is  always  subordinate  to  the  more  important 
questions  of  business  policy.  For  instance,  one  State 
may  offer  inducements  in  the  way  of  reduced  incor- 
portion  fees  and  enlarged  privileges — in  short,  a 
more  favorable  franchise;  but  when  this  is  compared 
with  the  other  objects  sought  to  be  accomplished,  it 
is  of  little  importance  to  the  organizer. 

Many  a  corporation  has  been  handicapped  by  mak- 
ing the  fatal  mistake  in  organizing  under  the  laws  of 
some  foreign  State.  Usually  companies  with  ulterior 
objects  seek  domicile  in  a  State  offering  the  greatest 
latitude  for  their  purposes — this  fact  being  so  noto- 
rious that  it  is  prima  facie  a  reflection  upon  legitimate 
undertakings  to  go  away  from  "home"  for  the  pur- 
pose of  organization.  However,  this  reflection  may 
be  removed  by  explanation,  when  the  peculiar  circum- 
stances of  the  particular  case  justify  the  selection  of 
a  foreign  State  for  incorporation,  as  they  frequently 
do. 

New  Jersey,  Maine  and  Delaware  have  gone  a  long 
way  toward  encouraging  corporations  to  organize  in 


WHEKE  TO  ORGANIZE.  37 

their  respective  States;  North  and  South  Dakota  and 
Arizona  have  attempted  to  do  likewise,  and  the  laws 
of  all  these  States  have  their  peculiar  advantages, 
particularly  over  those  of  some  of  the  other  States 
where  corporations  would  naturally  desire  to  locate 
on  account  of  the  business  advantages  offered. 

It  will  be  found  that  in  the  States  where  business 
is  most  centralized,  and  where  the  actual  business  of 
most  business  corporations  is  transacted,  the  laws  are 
more  or  less  stringent,  and  some  are  unreasonable 
and  obsolete;  but,  in  some  of  these  last-mentioned 
States  the  intention  at  least  is  to  protect  stockholders 
and  creditors,  and  for  the  legitimate,  well-meaning 
enterprise  it  is  often  best  to  submit  to  these  condi- 
tions and  organize  at  home. 

Particularly  is  this  true  where  outside  capital  is  to 
be  interested.  Prospective  investors,  as  a  rule,  invest 
their  money  under  the  advice  of  legal  counsel,  and 
local  attorneys  are  naturally  more  familiar  with  the 
laws  and  decisions  of  the  courts  thereabout,  in  their 
own  State,  and  can  advise  their  clients  more  readily 
and  securely;  and  in  addition  to  this  fact,  the  invest- 
ing clients  themselves  feel  more  secure  in  their  rights 
when  the  corporation  is  organized  under  the  local 
State  laws. 

The  State  of  West  Virginia  was  the  first  to  offer 
inducements  to  foreign  corporations  in  the  way  of 


38  WHEKE  TO  OKGANIZE. 

reduced  incorporation  fees  and  enlarged  powers  and 
limited  liability.  A  large  number  of  the  modern  com- 
bination organizations  were  attracted  to  that  State 
on  that  account,  but  after  organizing  there,  the  Legis- 
lature changed  the  laws,  and  it  was  otherwise  deemed 
necessary  to  leave  the  State  and  incorporate  else- 
where, particularly  in  New  Jersey. 

It  must  be  borne  in  mind  that  in  nearly  all  of  the 
States  the  right  to  change  the  General  Incorporation 
Act  is  reserved  by  the  Legislature,  and  the  advan- 
tages offered  may  be  diminished  or  repealed  at  any 
time,  and  the  privileges  of  the  corporation  curtailed. 

In  addition  to  this  possible  objection,  most  States 
have  recognized  the  fact  that  their  local  capital  have 
sought  other  States  for  the  purpose  of  organization 
only  to  evade  the  payment  of  the  local  incorporation 
fees,  and  to  otherwise  evade  the  provisions  of  the  laws 
of  the  respective  States  where  such  corporations  in 
fact  intend  to  operate.  To  protect  themselves,  special 
acts  have  been  passed  by  most  of  the  States,  similar 
to  that  now  in  force  in  Illinois,  which  defeats  nearly 
all  of  the  advantages  heretofore  obtained  by  organiz- 
ing in  any  of  the  foreign  jurisdictions. 

The  present  act  of  Illinois  relating  to  "  Foreign 
Corporations "  is  given  verbatim  in  the  Appendix;* 
and  most  of  the  States  have  the  same  or  a  very  simi- 

*  Appendix,    page   258. 


WHEBE  TO  OKGANIZE.  39 

lar  statute  for  the  regulation  of  foreign  corporations. 

For  the  convenience  of  prospective  incorporators,  a 
synopsis  of  the  Corporation  Laws  of  the  States  of 
New  Jersey,  Delaware,  Maine  and  South  Dakota  will 
also  be  found  in  the  Appendix,!  which  shows  the  spe- 
cial powers,  statutory  fees  and  other  information 
desirable  for  a  preliminary  understanding  and  con- 
sideration of  the  questions  to  be  taken  into  account 
when  selecting  a  State  in  which  to  organize. 

The  various  statutes  of  those  States  deemed  most 
favorable,  and  above  referred  to,  have  numerous 
minor  provisions,  presumably  for  the  protection  of 
stockholders  and  the  public  generally,  which  often 
serve  to  furnish  dissatisfied  stockholders  with  the 
means  of  annoying  and  otherwise  interfering  with  the 
business  of  a  corporation  organized  in  a  foreign  juris- 
diction. 

It  will  be  seen,  by  reference  to  these  statutes,  that 
the  objects  to  be  obtained,  and  suggested  here,  must 
be  taken  into  consideration,  first  in  this  as  well  as  in 
other  questions  relating  to  the  organization  of  a  busi- 
ness corporation ;  and  the  important  question  to  decide 
is  always,  What  effect  will  the  organization  of  the  par- 
ticular corporation  under  the  laws  of  a  foreign  State 
have  upon  its  business  success? 

t  Appendix,  page  247. 


40  WHEKE  TO  ORGANIZE. 

Whenever  the  laws,  conditions,  purposes  or  plans 
justify  the  decision  to  incorporate  in  a  state  other  than 
that  in  which  the  parties  in  interest  reside,  or  where 
the  principal  operations  are  to  be  conducted,  it  is  of 
first  importance  that  a  proper  statutory  agent  or  local 
representative  be  chosen  to  represent  the  new  corpora- 
tion, both  to  bring  it  into  existence,  and  thereafter  in 
qualifying  under  the  laws  of  the  state  relating  to 
domicile,  such  as  maintaining  a  statutory  office,  acting 
as  local  resident  agent,  director  or  officer — as  the  laws 
may  require — for  the  acceptance  of  service  of  legal 
process,  the  keeping  of  certain  corporate  books  or  rec- 
ords, etc.,  all  of  which  require  reliable,  competent  and 
permanent  attention  in  order  that  such  new  corpora- 
tion may  not  suffer  loss  through  unknown,  or  unneces- 
sary litigation,  statutory  fines,  etc. 

Similar  important  services  are  necessary  when  any 
corporation  attempts  to  comply  with  the  various 
' 1 Foreign  Corporation  Acts"  by  establishing  local 
branches  in  states  foreign  to  that  of  their  creation; 
and  here  as  before  the  questions  of  reliability,  experi- 
ence, facilities  to  serve,  and  permanency  (rather  than 
economy)  should  control  in  the  selection  of  a  repre- 
sentative for  the  conduct  of  such  foreign  affairs. 


CORPORATE  FINANCING 


CHAPTEE  II. 

CORPORATE  FINANCING. 

CAPITAL,  BONDS  AND  STOCKS. 

CAPITALIZATION  OF  COBPOBATIONS. 

RAISING  OF  ADDITIONAL  CAPITAL. 

TRANSFERRING  OF  AN  ESTABLISHED  BUSINESS  TO  A  COBPOBATION. 


Capital         ^ne  questions  of  finance  are  among 

Bonds    and     the  most  difficult  —  if  not  the  most  im- 

stocks.  portant  —  with  which  the  organizer  of  a 

business  corporation  has  to  deal,  and  like  other  ques- 

tions of  business  policy,  they  are  necessarily  governed 

by  the  circumstances  of  the  undertaking  in  hand. 

It  is  necessary  for  a  correct  understanding  of  the 
questions  of  corporate  finance  that  the  distinction  be- 
tween the  terms  capital  stock,  shares  of  stock  and 
capital  be  understood.  At  the  same  time,  an  under- 
standing of  the  nature  and  peculiar  characteristics  of 
stock  as  property  is  essential. 

The  difference  between  the  capital  stock  and  capital 
of  a  corporation  is,  that  the  former  constitutes  the 
amount  divided  into  shares  or  parts  at  which  the  in- 
corporators  have  limited  the  issuance  of  stock  —  in 
other  words,  the  amount  upon  which  calls  may  be  made 

(43) 


44  CAPITAL,  BONDS  AND  STOCKS. 

upon  the  stockholders  and  dividends  paid;  while  the 
capital  of  a  corporation  is  the  proceeds  of  the  sale  of 
this  capital  stock,  and,  in  addition  thereto,  all  money 
or  property  of  the  corporation  acquired  from  any  and 
all  lawful  sources.  The  former  amount  remains  the 
same  until  changed  by  consent  of  the  State,  while  the 
latter  may  vary  according  to  the  success  of  the  enter- 
prise. 

The  term  shares  of  stock  means  the  several  parts 
into  which  the  capital  stock  is  divided,  e.  g.,  if  the  cap- 
ital stock  of  a  corporation  is  $100,000,  and  the  denom- 
ination of  the  shares  is  fixed  at  $100  each,  a  share  of 
stock  represents  one  one-thousandth  part  of  the  prop- 
erty of  the  corporation.  Then  these  shares  of  stock 
are  represented  by  stock  certificates,  which  may  be 
made  out  to  represent  one,  or  any  number  of  shares 
of  the  capital  stock,  according  to  the  will  of  the  makers 
of  the  certificate. 

The  proceeds  of  the  sale  of  the  capital  stock — the 
capital — belongs  to  the  corporation,  and  the  owners 
of  such  capital  stock  have  no  right  to  withdraw  any 
part  of  such  proceeds  after  it  is  once  paid  into  the 
treasury;  and  this  is  the  law,  even  if  all  the  capital 
stock  is  owned  and  held  by  one  individual.  As  here- 
tofore stated,  the  corporation  is  a  legal  entity — a  per- 
son in  the  eyes  of  the  law — and  the  stockholders, 
directors  and  officers  combined  do  not  constitute  the 


CAPITAL,  BONDS  AND  STOCKS.  45 

corporation.  A  stockholder,  by  reason  of  his  owning 
stock  in  a  corporation,  does  not  thereby  acquire  title 
or  right  to  the  profits  or  surplus  of  a  corporation, 
until  the  same  has  been  formally  and  legally  "  de- 
clared "  by  the  Board  of  Directors  and  formally  set 
apart  for  the  stockholders ;  at  the  same  time,  a  stock- 
holder has  no  title  or  individual  interest  in,  or  rights 
to,  the  property  of  a  corporation  until  a  dissolution 
takes  place.  He  cannot  even  acquire  a  good  title  to 
the  property  of  a  corporation  by  purchasing  all  of  its 
stock  and  then  abandoning  the  corporate  existence. 

There  are  but  two  general  classes  of  stock  in  a 
business  corporation  which  need  be  here  referred  to, 
namely,  common  and  preferred.  Many  American 
writers  on  Corporation  Law  give  other  classifications, 
such  as  "watered  stock/'  "deferred  stock,"  "special 
stock"  and  "over-issued  stock/'  but  they  all  fall 
within  the  above  classification,  or  are  of  no  importance 
in  this  connection,  except  to  understand  the  meaning 
of  the  terms  employed. 

"Watered  stock "  means  simply  stock  that  has  been 
issued  and  not  paid  for,  in  money  or  money 's  worth, 
to  the  extent  of  the  face  value  of  the  stock  issued; 
"deferred  stock"  is  in  reality  a  bond  under  another 
name;  "over-issued  stock" — as  its  name  implies — is 
stock  that  is  issued  in  excess  of  that  authorized  by 
law,  or  for  which  the  corporation  was  originally  cap- 


46  CAPITAL,,  BONDS  AND  STOCKS. 

italized;  and  the  term  "  special  stock"  is  a  class  of 
corporate  property  unknown  in  any  other  State  but 
Massachusetts,  where  it  is  created  and  authorized  by 
the  laws  of  the  State. 

Common  stock  is  a  general  interest  in  common  in 
the  property  of  a  corporation.  It  is,  like  all  other 
stock,  divided  into  parts  or  shares  which  represent  a 
certain  proportionate  part  of  the  whole.  This  class  of 
stock  confers  equal  rights  and  privileges  among  all 
its  owners,  such  as  the  right  to  share  in  the  profits  of 
the  business;  to  vote  for  directors;  and  upon  a  disso- 
lution of  the  corporation,  to  share  equally  with  all 
other  stockholders,  in  the  division  of  the  assets,  etc. 

Preferred  stock  is  a  special  interest  and  contract 
combined  whereby  the  corporation  agrees  to  pay  its 
owners  a  certain  specified  dividend  out  of  the  net 
profits  of  the  business  in  advance  and  in  preference 
to  the  common  stockholders. 

It  may  not  be  amiss  to  here  refer  to  some  of  the 
important  differences  between  preferred  and  common 
stock.  The  former  provides  for  a  guaranteed  divi- 
dend out  of  the  net  profits,  usually  the  customary  rate 
of  interest  of  the  State  where  the  corporation  is  or- 
ganized. Such  dividends  can  be  made  cumulative  or 
non-cumulative;  that  is,  should  the  net  profits  for 
any  one  year  be  insufficient  to  pay  the  dividend  named, 
any  unpaid  portion  of  such  dividend  shall  be  made 


7  ur     i  ri 

UNIVERSITY 

OF 


CAPITAL,  BONDS  AND  STOCKS.  47 

up  and  paid  out  of  the  profits  of  any  subsequent  year, 
before  dividends  can  be  applied  to  the  common  stock, 
or  any  other  class. 

Common  stock  has  no  guaranty  of  dividends,  even 
if  there  should  be  net  profits,  but  is  entitled  to  all  of 
the  earnings  of  the  company  after  the  dividend  is  paid 
on  the  preferred  stock;  and  unless  the  conditions  of 
the  preferred  stock  are  such  as  to  prevent,  it  will  pro- 
rate with  the  common  stock  in  all  dividends  that  may 
be  earned  and  declared,  after  the  dividend  has  been 
paid  on  the  preferred  stock,  and  an  equal  amount  paid 
to  the  holders  of  the  common  stock. 

The  conditions  upon  which  preferred  stock  is  issued 
govern  all  the  rights  of  its  holders,  and  constitute  a 
contract  between  the  corporation  and  the  holder;  and 
in  the  absence  of  a  condition  to  the  contrary,  preferred 
stockholders  may  vote  and  exercise  all  the  rights  of 
the  holders  of  the  common  stock. 

Some  of  the  State  statutes  do  not  provide  for  the 
issuing  of  preferred  stock,  but  it  has  been  repeatedly 
held  that  such  stock  may,  nevertheless,  be  issued  if  it 
is  provided  for  at  the  time  of  organization;  and  such 
preferred  stock  may  also  be  issued  at  any  time  there- 
after, with  the  consent  of  the  holders  of  all  the  com- 
mon stock  of  the  corporation. 

A  Stock  Certificate  is  not  necessary  to  the  owner- 
ship of  stock  in  a  corporation.  It  is  merely  evidence 


48  CAPITAL,  BONDS  AND  STOCKS. 

of  the  ownership;  the  stock  exists  independently  of 
the  certificate  itself. 

Shares  of  stock  are  a  peculiar  species  of  property. 
They  are  intangible,  and  resemble  what  is  termed  in 
law  a  chose  in  action — that  is,  a  right  or  claim  which 
can  be  reduced  to  writing  and  enforced  in  a  court  of 
law. 

Shares  of  stock  are,  in  the  absence  of  a  statute  ex- 
pressly authorizing  the  same,  not  subject  to  levy  and 
sale  upon  execution,  like  other  personal  property; 
however,  most  of  the  States  have  enacted  laws  whereby 
such  levy  may  be  made.  It  is  necessary  to  get  per- 
sonal service  on  the  owner  of  stock,  or  to  get  physical 
possession  of  the  certificate  representing  it;  and  it 
has  been  decided  that  attempting  to  levy  on  the  stock 
of  an  individual  through  the  corporation  is  ineffectual, 
which  demonstrates  the  principle  above  stated  that 
this  species  of  property  is  somewhat  peculiar,  and 
differs  from  a  claim  for  money  or  property,  in  that 
particular  at  least. 

Then,  in  addition,  shares  of  stock  possess  many 
features  of  negotiability.  For  instance,  by  simply 
indorsing  the  certificate  in  blank,  stock  may  be  trans- 
ferred from  one  individual  to  another  by  delivery  of 
the  certificate,  and  the  right  to  insert  the  name  of  any 
intermediate  or  ultimate  owner,  and  to  have  the  stock 
transferred  to  such  owner  upon  the  books  of  the  com- 


CAPITAL,  BONDS  AND  STOCKS.  49 

pany,  passes  with  the  certificate  indorsed  in  that  way — 
which  enables  the  possessor  of  this  species  of  property 
to  readily  use  the  same  as  security  for  financial  accom- 
modation. 

Bonds  are  formal  obligations  executed  by  a  corpora- 
tion and  usually  secured  by  trust  deed  upon  the  plant 
or  assets  of  the  company.  They  are  ordinarily  issued 
in  denominations  of  a  size  that  will  enable  the  corpora- 
tion to  negotiate  a  large  loan  among  a  number  of 
investors,  and  to  secure  alike  any  number  of  holders  of 
such  obligations. 

The  terms  of  payment  and  security  of  bonds  are 
wholly  dependent  upon  the  will  of  the  corporation 
creating  them.  The  usual  object  of  issuing  this  form 
of  obligation  is  to  obtain  what  is  termed  a  "permanent 
loan, ' '  or  financial  accommodation  for  a  long  time,  and 
upon  a  low  rate  of  interest,  in  order  that  the  same  may 
be  used  for  the  advancement  of  the  business,  and  to 
be  repaid  out  of  the  profits  of  the  enterprise. 

It  is  customary  to  make  such  obligations  payable 
to  the  bearer ;  and  when  this  is  done,  they  are  suscept- 
ible of  being  transmitted  from  one  person  to  another 
without  formality  of  any  kind.  The  law  presumes 
ownership  with  their  possession,  when  made  in  that 
way. 

The  conditions  of  a  trust  deed  made  to  secure  such 
bonds,  as  well  as  the  terms  of  the  bonds  themselves, 


50  CAPITAL,  BONDS  AND  STOCKS. 

may  be  made  to  facilitate  or  hinder  their  sale;  conse- 
quently great  care  is  necessary  in  the  preparation  of 
both. 

Bonds  may  be  drawn  so  as  to  be  convertible  into 
stock,  at  the  option  of  the  holder,  and  in  this  way 
facilitate  their  sale,  by  enabling  the  owner  to  practi- 
cally invest  in  the  enterprise,  and  in  case  of  success,  to 
convert  his  bond  holdings  into  stock.  And  on  the 
other  hand,  if  the  venture  proves  less  profitable  as  an 
investment  than  the  interest  guaranteed  by  the  bonds, 
the  holder  is  secured,  and  can  ultimately  recover  his 
investment,  with  interest. 

Bonds  may  also  be  issued  in  lieu  of  dividends.  By 
so  doing,  the  amount  of  the  dividend  may  be  retained 
in  the  business  for  development  purposes,  and  the 
stockholders  will  have  received  what  is  equivalent  to 
the  dividend  as  well. 

The  foregoing  simply  explains  the  latitude  and 
some  of  the  advantages  afforded  the  creator  of  bonds 
and  stocks.  The  terms  that  may  be  incorporated  in 
stock  certificates  and  industrial  bonds  are  always  a 
subject  of  contract  between  the  corporation  and  the 
purchaser;  such  terms  are  limited  only  by  general 
rules  of  law  and  business  expediency. 

The  term  debenture  is  often  used  interchangeably 
with,  or  substituted  for,  the  word  bond.  While  the 
meaning  of  the  term  debenture  is,  strictly  speaking, 


CAPITALIZATION  OF  CORPORATIONS.  51 

the  evidence  of  an  existing  debt,  it  may  be  a  simple 
debt,  and  unsecured ;  but  common  usage  has  established 
many  qualifications  to  the  word  bond,  and  they  are  ap- 
proved in  the  world  of  finance,  and  their  meaning  and 
significance  understood. 


capitaiiza-  ^  ^s  comparatively  a  simple  matter  to 
tion  of  cor-  determine  the  questions  relating  to  capi- 
porations.  talization  where  the  number  of  parties 
in  interest  are  few,  or  in  a  case  where  the  business  to 
be  capitalized  is  what  is  termed  a  "  close  corpora- 
tion. "  In  such  cases  the  objects  to  be  accomplished 
are  usually  confined  to  the  conduct  of  a  single  business 
venture  for  the  benefit  of  a  limited  number  of  per- 
sons, and  the  questions  that  arise  under  other,  and 
ordinary  circumstances,  are  absent.  It  is,  therefore, 
unnecessary  to  discuss  the  capitalization  of  such  a 
corporation  as  is  here  alluded  to,  for  it  is  presumed 
that  no  outside  assistance  or  interest  will  be  desired. 
It  is  where  the  rights  of  the  parties  are  to  be  con- 
sidered at  the  time  of  organization — in  order  that 
they  may  be  protected  under  present  conditions  and 
future  business  developments,  and  that  the  needs  of 
a  business  may  be  provided  for  at  the  time  of  organi- 
zation, as  well  as  in  the  future — that  this  subject  re- 
quires special  attention. 


52  CAPITALIZATION  OF  COKPOKATIONS. 

A  business  with  a  good  foundation  and  prospects 
may  be  greatly  handicapped,  and  its  opportunities  for 
successful  promotion  be  "killed,"  by  over-capitaliza- 
tion. For  example,  A  had  a  valuable  patented 
device  that  was,  in  itself,  the  foundation  for  a  success- 
ful business  venture.  He  formed  a  corporation  and 
capitalized  it  at  $2,000,000,  when  as  a  matter  of  fact, 
$100,000  was  all  the  working  capital  which  was  neces- 
sary for  the  successful  conduct  of  the  business. 

By  manipulations,  hereinafter  more  fully  explained, 
the  business  was  so  arranged  as  to  offer  this  stock 
at  a  ridiculous  figure  (below  par,  of  course),  with  the 
result  that  after  disposing  of  a  certain  amount  of  this 
stock — enough  to  get  the  business  thoroughly  en- 
tangled, and  to  demonstrate  that  such  a  plan  was  not 
feasible,  and  that  sufficient  money  could  not  be  raised 
thereby  to  exploit  the  device  and  promote  the  busi- 
ness— it  became  necessary  to  reorganize  the  company, 
and  to  re-capitalize  it  at  a  reasonable  amount,  before 
the  business  could  be  financed  sufficiently  to  dem- 
onstrate the  earning  capacity  of  the  device. 

Numerous  other  cases  illustrating  the  principle 
above  set  forth  could  be  given,  but  they  are  of 
such  frequent  occurrence  as  to  be  familiar  to  everyone 
who  has  had  experience  in  business  organization. 

At  the  same  time,  the  capitalization  of  a  business 
corporation  at  an  amount  less  than  the  immediate  or 


CAPITALIZATION  OF  CORPORATIONS.  53 

future  prospective  requirements  of  the  business  will 
admit,  may,  and  usually  does,  furnish  an  occasion 
for  reorganization.  What  may  be  considered  suffi- 
cient capital  for  present  needs  may  prove  wholly  in- 
adequate after  the  business  has  been  developed,  and 
unless  this  contingency  has  been  taken  into  account 
at  the  time  of  organization  the  providing  of  addi- 
tional capital  is  always  a  difficult  question;  for  the 
rights  of  the  stockholders  will  have  accrued  in  the 
meantime,  and  their  consent  to  such  an  object  may 
be  necessary  and  difficult  to  obtain. 

Under  the  laws  of  Illinois  (and  most  other  States) 
it  is  necessary  to  obtain  the  consent  of  stockholders 
owning  two-thirds  of  the  capital  stock  before  an  in- 
crease of  the  same  can  be  legally  accomplished;  and 
unless  the  amount  of  capitalization  at  the  time  of 
organization  is  sufficient  to  provide  for  the  future  needs 
of  a  business  the  absence  of  this  consent  may  defeat 
the  raising  of  such  needed  capital,  in  that  way. 

There  is,  of  course,  no  arbitrary  or  settled  rule  for 
fixing  the  amount  of  capitalization  of  a  business  cor- 
poration, but  the  effectual  and  conservative  rule 
usually  adopted  for  the  guidance  of  incorporators  is 
that  the  demonstrated  or  reasonably  prospective  earn- 
ing capacity  of  a  business  should  control  in  fixing  the 
amount.  If  the  question  arises  in  the  reorganization 
of  a  going  business,  its  past  record  and  reasonable 


54  CAPITALIZATION  OF  COEPOBATIONS. 

future  prospects  based  thereon,  are  legitimate  sub- 
jects for  consideration  and  guidance  in  fixing  the 
capitalization.  As  an  illustration :  Where  a  business 
has  shown  a  net  profit  of  15%  on  the  capital  employed, 
it  would  not  be  out  of  proportion  to  capitalize  a  cor- 
poration, which  was  to  operate  such  a  business  in  the 
future,  at  three  times  the  amount  formerly  invested 
therein.  On  the  other  hand,  if  the  proposition  under 
consideration  is  a  wholly  new  business  venture,  its 
present  and  conservatively  estimated  future  prospects 
should  form  the  basis  of  capitalization;  and  these 
prospects  may  be  arrived  at  by  various  methods 
usually  known  to  those  experienced  in  the  particular 
line  of  business  under  consideration. 

There  are  usually  but  two  important  considerations 
in  fixing  the  capitalization  of  a  corporation,  and  they 
are,  first,  to  enable  the  company  to  obtain  working 
capital;  and  second,  to  protect  the  rights  of  the  pres- 
ent parties  in  interest.  In  accomplishing  the  former, 
due  regard  should  be  entertained  for  the  opinions 
and  judgment  of  those  who  may  be  invited  to  invest 
in  the  undertaking. 

The  manner  of  capitalizing  a  corporation,  that  is 
in  fixing  the  classification  of  stock  to  be  issued— 
whether  preferred  or  common,  or  both — is  also  im- 
portant, and  this  should  be  done  at  the  time  of 
organization,  as  far  as  possible,  for  reasons  already 
alluded  to. 


CAPITALIZATION  OF  CORPORATIONS.  55 

In  the  reorganization  of  a  corporation  or  business 
it  is  frequently  desirable  that  the  former  owners  of 
the  business  should  continue  to  be  interested  in  the 
enterprise,  by  accepting  stocks  or  bonds,  or  both,  in 
payment  for  their  interest  conveyed  to  the  corpora- 
tion. This  may  be  accomplished  by  issuing  preferred 
stock  to  cover  all  the  interest  of  such  persons,  or  to 
issue  bonds  to  cover  the  conservative  value  of  the 
tangible  property,  and  common  stock  in  payment  of 
the  Good  Will  and  other  intangible  assets  conveyed. 
If,  on  the  other  hand,  it  is  the  desire  of  those  interested 
to  ultimately  dispose  of  their  holdings  entirely  (in 
other  words,  to  incorporate  for  the  purpose  of  dis- 
posing of  their  business),  this  may  be  accomplished 
through  the  bond  issue,  or  by  the  issuing  of  preferred 
stock  which  is  preferred  as  to  the  assets  as  well  as  to 
profits;  for  they  are  both  more  likely  to  find  a  ready 
sale  than  common  stock,  particularly  while  the  enter- 
prise is  in  its  infancy. 

The  question  of  whether  the  interest  conveyed  shall 
be  paid  in  preferred  stock  or  bonds  is  simply  one  of 
expediency;  in  either  event,  the  party  interested  is 
protected.  The  principal  and  controlling  difference 
between  preferred  stock  (such  as  is  here  suggested) 
and  bonds  secured  by  a  trust  deed  on  the  plant  of  an 
established  business,  is  that  the  bonds  secure  the 
holder  ahead  of  subsequent  creditors  and  guarantee 


56  CAPITALIZATION  OF  CORPORATIONS. 

the  payment  of  a  certain  rate  of  interest,  while  the 
preferred  stock  does  not  insure  a  dividend  unless  it 
is  earned,  and  is  not  a  lien  on  the  assets;  and  with 
these  differences,  they  may  be  considered  as  of  equal 
value  and  security.  If  the  business  management  and 
conditions  justify  the  accepting  of  preferred  stock  of 
this  character,  it  is  frequently  desirable  to  do  so  in 
preference  to  issuing  bonds ;  for  with  such  preferred 
stock  there  is  no  indebtedness  against  the  business  to 
injure  its  credit  and  prospects,  which  would  be  the 
case  if  a  bond  issue  was  adopted. 

The  capitalization  of  a  new  venture  without  a 
nucleus  or  established  business  as  a  basis,  and  where 
the  organizers  depend  upon  the  sale  of  stock  for  work- 
ing capital,  presents  more  difficulties. 

Ordinarily,  there  are  a  number  of  persons  interested 
in  such  undertaking  at  the  time  of  organization  who 
propose  to  contribute  a  certain  amount  toward  its 
promotion  and  establishment  but  expect  to  raise  the 
majority  of  the  capital  by  the  sale  of  stock. 

Where  such  a  condition  exists,  it  is  advisable  to 
have  both  preferred  and  common  stock,  the  proportion 
of  which  must  depend  upon  the  circumstances  of  the 
particular  case  in  hand.  An  approved  and  dem- 
onstrated plan,  however,  is  to  have  the  stock  divided 
equally;  that  is,  one-half  preferred  and  one-half  com- 
mon, and  to  capitalize  the  corporation  at  an  amount 


CAPITALIZATION  OF  CORPORATIONS.  57 

sufficient  to  make  the  proceeds  from  the  sale  of  the 
preferred  stock  furnish  the  immediate  working  capi- 
tal, and  to  leave  the  common  stock  for  sale  for  future 
development  purposes,  after  its  earning  capacity  has 
been  demonstrated;  or  if  it  is  feasible  to  do  so,  have 
the  preferred  stock  cumulative  as  to  dividends,  and 
preferred  as  to  assets,  and  to  sell  as  near  as  possible 
an  equal  proportion  of  each  class  of  stock  at  the  out- 
set. In  this  way,  the  investor  is  insured  a  dividend 
on  one-half  his  investment,  if  the  business  earns 
enough  to  pay  it ;  and  in  the  event  of  a  dissolution  or 
failure,  he  would  be  protected  ahead  of  common  stock- 
holders in  the  same  proportion.  Then  enough  of  this 
preferred  stock  would  be  retained  to  aid  the  sale  of 
the  common  stock,  should  the  business  require  it. 

There  are  numbers  of  circumstances  which  permit 
of  the  issuing  of  all  common  stock,  particularly  among 
the  smaller  undertakings,  and  of  course  this  is  to  be 
recommended  whenever  the  conditions  will  justify 
such  a  course — that  is,  when  the  capital  necessary  for 
the  needs  of  the  business  can  be  as  readily  obtained 
in  that  way. 

After  the  amount  and  manner  of  capitalization  of  a 
business  <  corporation  has  been  determined  there  still 
remain  for  consideration  the  terms  and  manner  of 
payment  of  the  stock  sold  or  subscribed  for. 

The  statutes  of  most  of  the  States  provide  for  a 


58  CAPITALIZATION  OF  CORPORATIONS. 

certain  minimum  amount  with  which  a  corporation 
may  begin  business,  and  this,  of  course,  must  be  paid 
in  at  the  time  of  organization.  In  the  absence  of  a 
statute  to  the  contrary,  the  payment  for  all  stock  in  a 
corporation  is  a  fit  subject  of  contract  (as  between  the 
subscriber  and  corporation),  and  in  the  absence  of 
any  contract  such  payment  is  subject  to  call  of  the 
Board  of  Directors. 

In  a  case  where  it  is  necessary  to  sell  stock  to  be 
paid  for  in  installments,  or  to  sell  stock  in  small  blocks 
or  installments,  the  approved  method  for  accomplish- 
ing this  purpose  is  to  issue  an  "installment  certifi- 
cate "  or  contract  for  the  ultimate  delivery  of  the  reg- 
ular stock  certificate  upon  complete  payment,  or  when 
a  certain  number  of  shares  shall  have  been  paid  for, 
etc.  Where  it  is  necessary  to  adopt  such  methods  for 
the  raising  of  capital,  it  is  usually  advisable  to  issue 
such  contracts  in  lieu  of  stock,  and  to  have  their  terms 
provide  for  the  delivery  of  the  regular  stock  certifi- 
cates upon  a  certain  specified  date,  far  enough  in  the 
future  to  insure  the  sale  of  all  stock  which  it  is  con- 
templated will  be  sold,  or  which  it  is  deemed  necessary 
to  sell,  in  that  way.  For,  if  the  regular  stock  certifi- 
cates are  delivered  as  the  stock  is  sold,  circmnstances 
may  make  it  necessary  or  profitable  for  the  purchasers 
to  dispose  of  some  or  all  of  their  stock  before  the  com- 
pany's unissued  stock  is  sold,  and  in  this  way  create 


CAPITALIZATION  OF  CORPORATIONS.  59 

a  competition  between  such  stockholders  and  the  cor- 
poration, and,  in  consequence,  demoralize  the  market 
and  hinder  the  sale  of  the  balance  of  the  company's 
stock. 

Such  a  certificate  as  is  here  alluded  to  must  be 
drawn  with  special  reference  to  each  particular  state 
of  facts.  An  approved  general  form  illustrating  the 
application  of  the  plan  here  referred  to  will  be  found 
in  the  Appendix.* 

Eecurring  to  the  subject  of  bonds :  Their  terms  and 
conditions,  and  the  terms  and  conditions  of  the  trust 
deed  made  for  their  security,  are  matters  of  impor- 
tance from  a  practical  standpoint,  both  to  the  corpora- 
tion issuing  them  and  to  the  prospective  purchaser  in 
the  open  market. 

While  it  is  necessary  that  these  provisions  should 
be  all  that  is  reasonably  required  for  the  protection  of 
the  investor,  care  should  be  exercised  in  making  their 
terms  to  suit  the  convenience  and  possible  contingen- 
cies of  the  business  of  the  corporation;  as  an  exam- 
ple, in  the  terms  of  their  payment  it  may  be  provided 
that  any  of  a  certain  series  of  bonds  may  be  retired 
by  the  corporation  upon  giving  reasonable  notice  to 
that  effect  upon  any  annual  interest  day,  and  by  pay- 
ing a  certain  reasonable  amount  for  the  privilege,  in 
the  shape  of  advance  interest.  In  addition,  the  de- 

•Appendix,  page  214. 


60  RAISING    OF   ADDITIONAL    CAPITAL. 

nomination  and  time  of  payment  should  be  considered. 
If  it  is  desired  to  sell  such  bonds  in  a  private  way, 
or  in  a  locality  wherein  the  persons  interested  are 
known,  the  making  of  small  denominations  may 
greatly  facilitate  their  sale  among  small  investors; 
and  the  time  of  payment  should  be  placed  at  a  conserv- 
ative distance  in  the  future  to  insure  the  ability  of  the 
company  to  repay  the  principal  when  due. 

It  is  often  advisable  and  necessary  that  the  stocks 
and  bonds  of  a  corporation  should  be  listed  with  the 
local  Stock  Exchange,  in  order  that  they  may  have  a 
market  among  investors  in  securities,  who  naturally 
look  to  such  a  source  for  information  concerning  the 
value  and  regularity  of  the  issue  offered  for  sale. 

Such  Exchanges  have  rules  for  the  protection  of 
their  members  and  the  public  which  must  be  complied 
with;  a  copy  of  that  portion  of  the  By-Laws  of  the 
Chicago  Stock  Exchange  is  given  in  the  Appendix,* 
and  the  conditions  there  imposed  are  similar  in  all 
respects  to  those  of  such  Exchanges  in  other  cities. 


Raising  If  the  corporation  is  legally  formed 

of  Additional     w[th  due  consideration  for  its  possible 

capital.        future  developments  and  financial  needs, 

and  the  business  has  been  legitimately  and  success- 


*  Page   245. 


RAISING   OF  ADDITIONAL   CAPITAL.  6.1 

fully  conducted,  and  its  books  and  records  accurately 
and  systematically  kept,  the  question  of  raising  addi- 
tional capital  is  comparatively  a  simple  one,  and  its 
acquirement  is  based  primarily  upon  the  financial  re- 
sponsibility and  business  prospects  of  such  an  enter- 
prise. 

Conditions  that  influence  sales  of  stocks  and  bonds 
are  often  created  at  the  time  of  the  organization  of  the 
corporation  creating  them.  It  is  when  some  or  all  of 
the  foregoing  features  are  lacking  that  difficulties  are 
encountered  and  failures  occur,  where  the  business 
itself  would  otherwise  justify  a  different  result.  And, 
it  might  be  added,  that  the  majority  of  failures  are,  in 
some  measure  at  least,  due  to  the  fact  that  the  proper 
attention  has  not  been  given  to  some  practical  ques- 
tion concerning  the  organization,  or  other  essential 
matters,  at  the  inception  of  the  undertaking. 

"When  the  corporation  is  confronted  with  embar- 
rassing questions  of  finance,  the  defects,  if  any,  in  its 
formation  or  subsequent  conduct  "  stand  out  in  bold 
relief/'  and  often  make  it  quite  impossible  to  accom- 
plish the  result  desired,  without  a  reorganization.* 

Capital  is  a  power  well  known  to  the  average  pos- 
sessor, and  it  is  necessary  to  take  this  fact  into  con- 
sideration when  it  is  sought  after ;  then,  the  viewpoint 
of  the  man  with  money  must  also  be  taken  into  account. 

*See  "Reorganization,"  page  115. 


62  BAISING   OF   ADDITIONAL   CAPITAL. 

While  there  are  many  selfish  and  grasping  persons, 
the  average  business  man  looking  for  a  business  oppor- 
tunity is  fair  and  reasonable  from  his  point  of  view; 
and  if  that  can  be  ascertained,  and  his  requirements 
fulfilled,  the  matter  of  interesting  him  in  a  business 
is  simplified. 

The  business  corporations  which  are  ordinarily 
seeking  capital  might  properly  be  included  within  the 
following  three  general  classifications,  and  they  will 
therefore  be  here  adopted,  and  considered  in  their 
order,  namely: 

First:  The  new  undertaking  which  has  passed 
through  the  experimental  period  (which  is  usually  the 
first  year),  and  finds  itself  without  sufficient  capital 
to  accomplish  the  original  objects. 

Second:  The  established  business  which  has  been 
built  up  by  a  firm  or  individual,  and  transferred  to 
a  corporation,  but  for  some  reason  the  capital  at  its 
disposal  proves  insufficient. 

Third:  The  business  with  visionary  plans,  and 
whose  objects  are  impractical,  desiring  to  obtain  capi- 
tal for  its  conduct  or  continued  operation. 

In  considering  the  first  class  of  enterprises  named 
it  will  be  assumed  that  all  necessary  and  proper  steps 
have  been  taken  in  the  organization,  and  that  the 
business  itself  is  of  recognized  merit.  It  is  also  here 
assumed  that  no  mistakes  had  been  made,  either  in 


RAISING   OF   ADDITIONAL   CAPITAL.  63 

the  domicil,  amount  of  capitalization,  or  other  practi- 
cal features,  and  also,  that  the  business  itself  shows 
a  fair  and  reasonable  prospect  for  ultimate  success. 

In  this  case,  as  in  all  others,  the  particular  circum- 
stances must  govern ;  but  generally  the  increasing  of  the 
capital  stock  of  such  a  company  is  the  most  satisfac- 
tory method  to  acquire  additional  capital,  particularly 
from  a  financial  standpoint.  Of  course,  the  sale  of 
such  stock  is  necessary,  and  if  the  business  will  admit 
of  additional  executive  assistance,  the  inducement  to 
an  investor  of  filling  an  office  of  responsibility — with 
reasonable  compensation — is  always  a  great  help  and 
an  important  element  in  effecting  such  a  sale. 

The  sale  of  a  large  issue  of  stock  is  always  difficult, 
unless  the  corporation  is  well  known,  in  the  hands  of 
recognized  dealers  in  the  line  of  business,  or  its  stock 
is  listed  on  the  local  Stock  Exchange. 

The  issuance  of  bonds  or  preferred  stock  with  a 
common  stock  bonus,  is  always  to  be  discouraged  from 
a  business  standpoint,  if  from  no  other;  and  the  con- 
servative man  of  money  is  rarely,  if  ever,  influenced 
thereby. 

Many  of  the  questions  here  presented  have  been 
already  considered  in  determining  the  capitalization 
of  a  new  corporation — under  the  preceding  heading — 
and  therefore  need  not  be  repeated;  the  general  prin- 
ciples there  announced  will  be  found  useful  in  the  solu- 


64  RAISING   OF  ADDITIONAL   CAPITAL. 

tion  of  questions  of  finance  whenever  a  business  falling 
within  this  classification  requires  financial  assistance. 

The  next  class  of  business  corporations  seeking  cap- 
ital, and  referred  to  above,  are  not  as  numerous  as  the 
first.  For,  assuming  that  no  mistakes  have  been  made 
in  the  essential  features  of  reorganization  and  that 
the  business  is  established,  little  difficulty  should  be 
met  in  raising  any  reasonable  amount  of  necessary 
capital  consistent  with  the  security  to  be  given. 

Here  we  are  also  confronted  with  the  peculiar,  im- 
portant circumstances  which  surround  every  case  of 
this  character.  Generally  such  a  business  has  assets 
of  a  permanent  nature — often  a  plant  which  would 
readily  be  accepted  as  ample  security  for  a  bond  issue 
sufficient  to  provide  the  necessary  working  capital; 
and  where  this  can  be  done  to  advantage,  it  is  well  to 
be  considered,  as  such  bonds  usually  are  salable  at 
par,  and  bear  a  low  rate  of  interest  and  can  be  made 
to  mature  far  enough  in  the  future  to  make  such  a 
plan  advisable  from  every  standpoint. 

Then  the  question  of  changing  location  is  to  be  con- 
sidered here,  as  it  is  in  the  class  of  companies  first 
above  named;  numerous  outlying  towns  and  localities 
desire  additional  manufacturing  industries,  and  they 
are  frequently  prepared  to  provide  locations  and 
financial  assistance,  either  in  the  form  of  a  bonus, 
or  by  subscribing  for  a  certain  amount  of  additional 


KAISING   OF  ADDITIONAL   CAPITAL.  65 

capital  stock.  These  opportunities  may  be  investi- 
gated, and  reliable  information  obtained  by  consult- 
ing the  Industrial  Agents  of  the  various  railroads, 
whose  business  it  is  to  give  assistance  in  such  mat- 
ters, both  to  the  industry  seeking  a  location  and  to  the 
town  in  procuring  the  enterprise  desired. 

The  third  class  of  enterprises  named  comprise  the 
majority  of  the  seekers  after  capital,  and  this  fact 
alone  makes  it  more  difficult  for  the  legitimate  and 
worthy  enterprises  to  secure  such  assistance. 

Manifestly,  the  greatest  benefit  to  all  persons  in- 
terested in  such  a  company  would  be  to  wind  up  its 
affairs  as  speedily  and  economically  as  possible;  but 
it  is  safe  to  predict  that  few  readers  of  this  book  will 
ever  concede  that  their  undertakings  or  business  ven- 
tures fall  within  the  lines  here  drawn. 

It  is  surprising,  however,  to  know  the  large  per- 
centage of  enterprises  struggling  to  keep  alive  and 
going  which  in  reality  may  be  fairly  considered  within 
this  class. 

It  is  not  infrequent,  however,  for  the  lawyer  to  be 
called  upon  to  scrutinize  the  affairs  of  such  enter- 
prises, and  he  should  be  qualified  and  ready  to  advise 
his  client,  not  alone  upon  the  legal  status  of  affairs  but 
upon  the  general  aspect  of  the  business  and  its  pros- 
pects. This  he  may  do  by  simply  investigating  along 
lines  that  are  well  defined  and  demonstrated  by  ex- 


66  RAISING   OF  ADDITIONAL   CAPITAL. 

perience.  For  instance,  a  company  that  to  all  intents 
and  purposes  has  " stock- jobbing"*  for  its  principal 
object  should  be  avoided  and  condemned;  a  company 
organized  for  the  purpose  of  conducting  some  specu- 
lative venture  at  a  great  distance  is  suspicious ;  a  busi- 
ness with  vast  natural  resources  wanting  "a  small 
amount  of  money  for  development  purposes, "  which 
should  readily  be  obtained  upon  the  company's  alleged 
assets,  is  usually  a  fraud;  the  company  that  has  been 
incorporated  without  an  established  business  for  a 
nucleus,  and  is  dependent  upon  the  sale  of  its  stock 
for  working  capital,  and  which  has  sold  a  portion  of 
its  stock  to  a  number  of  small  investors,  the  proceeds 
received  from  such  sale  being  insufficient  to  dem- 
onstrate the  success  of  the  business  contemplated,  or  to 
materially  advance  it  beyond  the  organization  or  ex- 
perimental period,  is,  as  a  rule,  of  doubtful  prospects 
— and  so  on. 

In  fact  the  earmarks  of  unworthiness  are  as  appar- 
ent in  a  business  enterprise  as  elsewhere,  and  are  dis- 
cernible by  proper  investigation,  and  knowledge  of  the 
affairs  investigated. 

No  one  is  justified  in  undertaking  a  business  venture 
without  at  least  the  moderate  capital  usually  required 
to  carry  it  on  (or  the  means  of  raising  such  capital), 
and  trusting  to  financial  accommodations  and  credit 

*See  "Stock-Jobbing,"  page  129. 


RAISING   OF   ADDITIONAL   CAPITAL.  67 

for  success.  It  is  undoubtedly  true  that  no  one  who 
has  tried  to  establish  a  business  without  a  suitable 
capital,  even  if  he  has  succeeded,  would  advise  another 
to  attempt  to  do  likewise ;  for  it  involves  an  amount  of 
anxiety,  labor,  embarrassment  and  hazard  which  is 
unpleasant  to  reflect  upon.  To  do  business  altogether 
on  credit  requires  a  fortunate  combination  of  circum- 
stances to  make  it  successful  that  no  prudent  man 
would  predict. 

It  might  be  said  with  propriety  that  the  universal 
law  of  trade  is  that  the  enterprise  which  attempts  to 
conduct  its  business  upon  borrowed  capital  alone  must 
sooner  or  later  fail — that  is,  where  the  company  at- 
tempts to  conduct  its  business  upon  financial  accom- 
modations secured  from  regular  sources,  such  as  bank- 
ing houses,  brokers,  etc.,  upon  trade  paper.  At  the 
same  time,  a  company  may  do  a  large  increased 
volume  of  business  upon  such  accommodations ;  in  fact, 
a  large  Chicago  corporation  practically  conducts  the 
principal  volume  of  its  business  upon  funds  secured  in 
that  way,  and  loans  its  own  capital  through  banking 
and  regular  financial  channels,  upon  a  higher  rate  of 
interest  than  it  is  required  to  pay  for  its  own  accom- 
modation. But  it  is  not  such  a  corporation  as  the 
ordinary  business  enterprise  could  safely  imitate;  its 
securities  or  trade  paper  could  be  converted  into 


68  EAISING   OF  ADDITIONAL   CAPITAL. 

money  at  any  time  and  nnder  any  circumstances,  with- 
out difficulty. 

There  is  a  tendency  among  aggressive  business  men 
to  "  mortgage  the  future, "  so  to  speak,  and  this  with- 
out regard  to  repayment.  The  securing  of  judicious, 
long-time  loans  upon  a  bond  issue  where  the  busi- 
ness requires  additional  capital,  is  not  alone  a  saving 
in  the  rate  of  interest  but  renders  the  undertaking  less 
hazardous,  and  more  convenient  and  certain  of  pay- 
ment out  of  the  profits  that  may  be  safely  estimated; 
besides,  the  bonds  of  a  staple  business  concern,  with 
tangible  assets,  are  invariably  in  good  favor  with  in- 
vestors. The  practical  questions  concerning  the  issu- 
ing of  such  bonds  and  preferred  stock  as  well,  have 
already  been  considered.* 

In  regard  to  the  extent  to  which  the  credit  of  a 
business  enterprise  may  safely  be  extended — that  is, 
the  proportion  which  the  capital  of  an  enterprise 
should  bear  to  its  liabilities — necessarily  varies  with 
conditions.  It  has  been  stated,  however,  by  eminent 
and  experienced  financiers  that  a  man  should  not  ex- 
tend his  business  more  than  three  times  the  amount 
of  his  capital  under  the  most  favorable  circumstances, 
and  if  it  be  a  large  business,  not  more  than  twice  his 
capital. 

We  have  already  alluded  to  what  has  proven  to  be 

*See  "Capital,  Bonds  and  Stocks,"  also  "Capitalization  of  Corporations." 


TBANSFEBBING  AN  ESTABLISHED  .BUSINESS.  69 

a  very  satisfactory  method  for  the  raising  of  addi- 
tional capital,  under  ordinary  circumstances,  and  that 
is  by  the  issuance  of  bonds,  drawing  a  reasonable  rate 
of  interest,  that  may  be  convertible  into  stock  within 
a  certain  given  period,  at  the  option  of  the  holder. 
This  enables  the  purchaser  of  such  bonds  to  avail  him- 
self of  the  privilege  of  becoming  a  stockholder  at  any 
time  within  the  period  provided  in  such  bonds,  should 
he  so  elect,  after  the  business  has  demonstrated  its 
merit,  and  the  enterprise  is  thereby  provided  with  the 
necessary  additional  capital,  which  it  can  repay  out  of 
the  profits. 

Many  business  men  will  readily  invest  in  such  bonds, 
with  the  privilege  of  changing  the  form  of  investment 
after  the  business  is  established,  who  would  not  in  the 
first  instance  purchase  stock. 


The   topic   of  this    section   has    fur- 
rin-  of  An     m*sne^  the  material  for  much  of  the  un- 
favorable  criticism  which  has  been  made 


Business  to     upon  the  corporate  plan  and  abuses  of 
Corpora-     ^e  corporate  system;  and  this  is  made 

tion. 

the  subject  of  a  separate  discussion  un- 
der appropriate  headings.*     At  the  same  time,  some 

*See  "Consolidation  of  Enterprises"  and  "Stock-Jobbing." 


70  TKANSFERBING  AN  ESTABLISHED  BUSINESS. 

of  the  legitimate  advantages  offered  through  the  con- 
summation of  transactions  of  this  character  have 
already  been  pointed  out.f 

In  the  preceding  pages  we  have  necessarily  dis- 
cussed many  of  the  important  questions  pertaining  to, 
and  which  invariably  arise  in  the  transferring  of  an 
established  business  to  a  corporation.  Those  hereto- 
fore discussed  have  had  to  do  with  the  advance  finan- 
cial arrangements  and  objects  to  be  accomplished 
rather  than  to  the  subsequent  rights  of  the  parties  to 
be  protected.  In  the  following  pages  particular  atten- 
tion is  given  to  the  substantial  benefits  to  be  derived 
from  the  corporate  plan  of  conducting  business,  as 
well  as  the  rights  of  the  parties  interested  therein. 

It  is  through  transactions  of  this  character  that 
advantages  are  obtained  by  the  owners  of  a  business, 
such  as  the  preservation  of  the  good  will,  facilitating 
the  sale  of  a  part  or  the  whole  of  the  business,  and  the 
obtaining  of  an  advantageous  price  for  the  business 
transferred,  etc. 

The  opportunity  last  referred  to  is  frequently 
abused;  that  is,  the  valuation  placed  upon  a  business 
about  to  be  transferred  to  a  corporation  is  inflated, 
and  the  question  frequently  occurs  "to  what  extent 
may  a  business  or  property  be  over- valued  without 
rendering  the  parties  in  interest  liable  therefor?" 

tSee  "The  Corporation  and  Its  Advantages." 


TRANSFERRING  AN  ESTABLISHED  BUSINESS.  71 

This  question  has  been  the  subject  of  much  litiga- 
tion, and  different  courts  have  taken  different  views 
thereon.  Without  attempting  to  enumerate  the  rules 
announced  in  the  various  decisions,  the  most  favored 
rule,  and  the  one  to  be  everywhere  regarded  as  safe, 
reliable  and  sound,  is  that  if  the  directors  act  in  good 
faith,  and  the  property  transferred  has  a  substantial 
value,  and  there  is  no  fraud  connected  with  the  trans- 
fer, their  valuation  is  final,  even  if  excessive. 

A  different  rule,  however,  obtains  in  some  of  the 
States,  where  the  statutes  make  the  action  of  the 
Board  of  Directors  in  relation  to  such  matters  final  in 
any  event.  This  rule  obtains  in  Delaware,  Maine,  New 
Jersey  and  New  York;  and  in  some  States,  where 
mines  and  mining  is  the  chief  subject  of  corporate 
organizations,  this  rule  is  recognized  either  by  statute 
or  by  the  courts  to  encourage  development  of  the  min- 
ing industry. 

More  latitude  is  everywhere  allowed  in  the  valua- 
tion of  what  are  known  as  speculative  assets  than 
where  the  property  is  staple  and  easily  valued ;  and  in 
every  case  the  question  of  what  the  property  is  worth 
to  the  corporation,  rather  than  what  it  is  worth  to  the 
individuals  selling,  will  govern. 

A  business  that  has  been  established  by  an  individ- 
ual or  an  association  of  individuals  under  a  firm  name, 
usually  possesses  a  valuable  property  right  in  the 


72  TRANSFERRING  AN  ESTABLISHED  BUSINESS. 

name  itself — which  is  in  reality  the  subject-matter  of 
the  good  will.  While  the  good  will  of  a  firm,  or 
individual  doing  business  alone,  may  be  the  subject  of 
transfer  and  sale,  and  therefore  valued  and  conveyed, 
still  it  is  never  possible  to  utilize  and  protect  this  form 
of  property,  or  obtain  its  full  value,  except  by  trans- 
ferring the  same  to  a  corporation.  The  reason  of  this 
is  that  while  the  trade  name  may  be  thoroughly  estab- 
lished and  the  means  of  influencing  trade,  it  is,  in  a 
measure,  perishable,  and  loses  much  of  its  value  once 
the  individuals  who  have  created  it  are  known  to  be 
no  longer  its  owners;  while  if  it  is  transferred  to  a 
corporation  organized  by  the  same  persons  who  es- 
tablished the  name,  it  becomes  permanently  associated 
with  the  corporation  and  with  the  other  advantages 
that  accrue  to  the  trade  name  of  a  corporation  (that 
are  not  possible  to  an  individual)  it  thereby  derives 
a  permanency  and  utility  that  cannot  be  lost. 

It  is  these  and  other  considerations  which  justify 
the  adequate  valuation  of  the  immaterial  assets  of  a 
firm  or  co-partnership  when  transferring  the  same  to  a 
corporation  for  the  ultimate  purpose  of  effecting  an 
advantageous  sale — enlargement  or  permanent  estab- 
lishment of  a  business. 

There  is  much  of  the  "personal  relation "  existing 
between  the  proprietor  of  a  business  conducted  by  an 
individual  or  co-partnership  and  the  patrons  thereof 


TEANSFEEEING  AN  ESTABLISHED  BUSINESS.  73 

that  has  its  advantages,  and  in  some  degree  at  least 
—and  in  certain  forms  of  enterprises — may  argue  in 
favor  of  the  personal  as  against  the  impersonal,  i.  e., 
corporation  relation ;  but  the  details  of  the  business  of 
a  corporation  can  and  should  be  so  organized  as  to 
overcome  this  objection — that  is,  by  creating  personal 
responsibility,  if  not  a  personal  interest,  for  depart- 
ment heads  in  the  various  important  departments  of 
the  corporation,  and  in  that  way  retain  the  personal 
interest  and  responsibility  so  essential  to  the  welfare 
of  every  business  conducted  upon  the  competitive  sys- 
tem. 

As  to  the  approved  manner  of  transferring  assets 
of  an  established  business  to  a  corporation  for  money, 
bonds  or  in  payment  for  its  stock:  If  the  business  is 
to  be  valued  and  purchased  from  an  inventory,  where 
the  property  conveyed  is  itemized,  the  resolution  of 
the  Board  of  Directors  taking  over  or  purchasing  such 
property  should  recite  that  the  property  had  been 
itemized  and  valued  at  the  aggregate  sum  of  whatever 
is  to  be  paid  for  the  business  conveyed ;  and  the  inven- 
tory may,  with  propriety,  be  copied  and  made  a  part 
of  the  bill  of  sale.  If,  on  the  other  hand,  the  business 
is  purchased  in  bulk — or  the  amount  of  property  esti- 
mated— then  the  resolution  of  the  Board  should  recite 
that  the  property  had  been  appraised  in  bulk  and  val- 


74  TEANSFEEEING  AN  ESTABLISHED  BUSINESS. 

ued  by  the  Directors  at  the  total  amount  to  be  paid 
therefor. 

It  is  essential  that  all  due  formality  should  be  ob- 
served in  the  purchase  and  transfer  of  assets  to  a  cor- 
poration in  payment  for  its  stock  or  otherwise,  and 
where  it  is  feasible,  the  proposition  to  sell  should  be 
made  to  the  corporation  by  formal  writing.  This  will 
enable  the  officers  to  make  proper  investigation  of  the 
business  offered,  and  at  the  same  time  the  written 
proposition  will  form  the  basis  of  an  appropriate  reso- 
lution of  purchase  and  a  complete  contract  of  sale 
when  accepted. 

If  there  is  real  estate  involved  in  the  transfer, 
naturally  the  title  will  be  carefully  examined  by  com- 
petent legal  counsel,  before  passing  upon  the  proposi- 
tion to  purchase;  and  in  such  cases  the  resolution 
should  recite  that  such  examination  had  been  made 
and  the  title  found  merchantable  or  otherwise,  and 
that  the  proper  conveyance  or  title  deed  had  been  exe- 
cuted by  the  owner  or  owners  and  tendered  to  the  cor- 
poration at  the  time  of  the  proposed  formal  acceptance 
of  the  offer  by  the  Board  of  Directors. 

In  the  Appendix  hereto,  will  be  found  a  general 
form  of  resolution  which,  according  to  the  facts  there 
assumed,  purports  to  purchase  and  take  over — through 
the  commissioners  appointed  by  the  Secretary  of  State 


TBANSFERBING  AN  ESTABLISHED  BUSINESS.  75 

of  Illinois — from  a  corporation  that  is  in  the  process 
of  reorganization,  an  established  business  in  payment 
for  stock  subscribed  for  by  the  reorganizer  mentioned 
in  the  Eeorganization  Certificate  shown.*  The  reso- 
lution there  given  will  suggest  the  method,  and  also 
the  form  of  resolution  applicable  for  the  purchase  of 
any  established  business  by  a  corporation  except  that 
in  the  case  there  assumed  no  written  proposition  was 
made  or  necessary,  on  account  of  the  fact  that  the 
purchasing  company  was  incorporated  for  the  express 
purpose  of  operating  the  business  purchased,  and  the 
directors  are  assumed  to  be  all  the  stockholders  as 
well,  and  all  present  and  acquiesce  in  the  terms  of  pur- 
chase and  sale.  In  such  a  case,  the  peculiar  facts  there 
assumed  (for  the  purpose  of  illustrating  an  approved 
plan  of  effecting  a  reorganization  which  will  be  fur- 
ther explained  under  a  subsequent  heading),  dispense 
with  such  written  proposition. 

In  every  case  where  a  business  is  transferred  from 
one  or  more  of  the  directors,  or  parties  in  interest, 
to  the  corporation,  it  is  always  advisable  to  have  the 
formal  consent  of  the  stockholders  to  such  a  purchase ; 
and  this  may  be  done  by  convening  a  special  meeting 
of  the  stockholders  for  that  purpose,  and  submitting 
the  question  of  purchase  to  a  vote,  and  having  the 

*See  form,  page  206. 


76  TRANSFERRING  AN  ESTABLISHED  BUSINESS. 

action  of  the  stockholders  in  that  regard,  a  matter  of 
record.  Such  a  resolution  would  simply  recite  the 
facts,  and  authorize  and  direct  the  Board  of  Directors 
to  consummate  the  transaction  and  purchase  the  busi- 
ness at  a  given  price,  or  at  the  best  price  obtainable. 
And,  it  might  be  added,  that  the  consent  of  the  stock- 
holders to  the  acquiring  of  a  separate  business,  or  to 
the  transaction  of  any  unusual  important  business,  is 
always  to  be  recommended.  Particularly  is  this  ad- 
visable where  the  stockholders  are  few,  or  the  cor- 
poration small. 


CORPORATE  MANAGEMENT 


CHAPTER  III. 

CORPORATE  MANAGEMENT. 

DIRECTORS,  OFFICERS  —  THEIR  DUTIES  AND  LIABILITIES. 

STOCKHOLDERS'  RIGHTS  AND  LIABILITIES. 

BY-LAWS  AND  THEIR  USES. 

CORPORATE  RECORDS  AND  BOOKS  OF  ACCOUNT. 

EXAMINATION  OF  BOOKS  AND  RECORDS. 


Directo  r  s  Duties  an^  liabilities  of  a  director 

ana  officers.  °^  a  business  corporation  are  co-exten- 

Their  Duties  sive  —  that  is,  his  powers  and  authority 

and     Liabil-  on   ^    one  ^^   are   Of    guch   a   nature 


that  they  lead  to  a  corresponding  re- 
sponsibility both  to  the  corporation  and  its  creditors. 
As  has  been  heretofore  shown,  the  authority  to  bind 
the  corporation  emanates  from  the  Board  of  Directors  ; 
and  in  consequence,  the  officers  are  responsible  to 
them.  The  officers  are  chosen  by  the  Board  of  Direct- 
ors, and,  unless  restricted  by  the  by-laws,  they  may 
be  removed  by  the  Board  for  sufficient  cause;  and  if 
the  by-laws  so  provide,  any  officer  may  be  removed  at 
the  pleasure  of  the  Board. 

Directors   cannot,  however,  act  individually;   they 
must  do  so  as  a  body.    That  is,  no  legislation  on  be- 

(79) 


80         DIRECTORS,  OFFICERS — DUTIES  AND  LIABILITIES. 

half  of  the  corporation  can  be  enacted  except  by  the 
Board  in  meeting  assembled,  and  the  will  of  the  Board 
when  thus  indicated,  is  to  be  carried  into  effect  by  the 
officers  of  the  corporation. 

The  peculiar  characteristics  of  a  corporation  often 
renders  notice  to  a  director  or  officer  also  notice  to  the 
corporation;  and  this  is  important  in  relation  to  the 
conduct  of  all  corporate  business;  such  notice  simply 
means  information. 

In  order  to  charge  a  corporation  with  such  notice, 
however,  the  directors  or  officers  must  be  shown  to  be 
acting  for  the  corporation  at  the  time  the  notice  is 
received,  and  also  that  the  employment  of  the  director 
or  officer  concerns  the  subject-matter  of  the  notice ;  in 
other  words,  the  director  or  officer  must  be  then 
engaged  for  the  corporation  in  such  a  way  as  to  ren- 
der the  notice  appropriate  to  his  office  or  employ- 
ment. 

Notice  to  a  Board  of  Directors  while  assembled, 
and  such  notice  to  one  of  them,  who  afterward  com- 
municates the  same  to  the  Board  in  session,  is  suffi- 
cient notice  to  the  corporation  in  any  event. 

Under  the  common  law,  directors  are  liable  for  issu- 
ing stock  as  fully  paid,  when  in  fact  the  same  is  not 
so.  They  are  also  liable  for  the  payment  of  dividends 
out  of  the  capital  stock  of  the  company,  and  for  any 
ultra  vires  acts  and  fraud  generally,  as  well  as  for 


DIRECTORS,  OFFICERS — DUTIES  AND  LIABILITIES.         81 

negligence  which  results  in  a  loss  to  the  corporation. 
In  other  words,  they  are  responsible  for  many  acts  of 
omission,  as  well  as  commission. 

Under  the  statutes  of  the  various  States  they  have 
a  further  liability  imposed,  whereby  they  are  held  to 
the  responsibility  of  a  trustee  under  certain  circum- 
stances. They  are  always  trustees  for  the  creditors 
of  a  corporation,  and  also  in  certain  dealings  in  rela- 
tion to  the  property  of  it.  The  question  of  their  deal- 
ing directly  with  the  corporation  is  frequently  the  sub- 
ject of  litigation,  and  they  are  invariably  held  to  a 
strict  rule  of  conduct  in  such  matters. 

A  business  corporation  has  no  power  or  authority 
to  loan  money;  hence  it  could  not  lawfully  do  so  to  a 
director.  And  the  rule  that  one  cannot  properly  oc- 
cupy the  dual  position  of  buyer  and  seller  is  particu- 
larly applicable  to  directors  of  such  companies — to 
the  extent  that  any  secret  advantage  thus  acquired 
may  be  recovered  from  such  directors.  At  the  same 
time,  they  may  not  abuse  any  information  acquired 
as  a  director,  or  obtain  secret  advantages  therefrom 
to  the  detriment  of  the  company. 

A  safe  rule  for  the  director  to  adopt  is  to  act  in  all 
things  pertaining  to  his  office  and  the  company  of 
which  he  is  such  a  director  in  the  same  way  as  he 
would  act  if  the  business  transacted  for  the  corpora- 
tion was  his  own  exclusively. 


82         DIRECTORS,  OFFICERS — DUTIES  AND  LIABILITIES. 

A  director  is  not  disqualified  to  act  in  any  official 
capacity  for  his  corporation  on  account  of  his  being  a 
director.  In  fact,  it  is  usual  for  directors  to  be  also 
the  officers  of  the  corporation.  Particularly  is  this 
true  in  small  or  medium-sized  companies. 

It  is  always  necessary  that  there  should  be  a  Presi- 
dent and  Secretary  in  every  business  corporation,  and 
it  is  usual  and  necessary  under  the  laws  of  some 
States  (e.  g.,  Illinois)  to  have  a  Treasurer,  as  well. 

The  number  of  officers  that  a  company  may  have 
is  only  limited  by  the  will  of  the  Board  of  Directors. 
It  is  frequently  provided  by  the  by-laws  that  cer- 
tain officers  of  the  corporation  should  also  be  direct- 
ors, and  this  is  proper  and  convenient;  for,  if  they 
are  directors  as  well  as  officers,  they  are  at  all  times 
conversant  with  the  consensus  of  opinion  of  the  Board 
in  relation  to  its  policy,  and  upon  all  matters  pertain- 
ing to  the  business. 

The  powers  and  duties  of  the  officers  of  a  corpora- 
tion depend  entirely  upon  the  provisions  of  the  by- 
laws, and  the  delegating  of  such  powers,  and  the 
classification  and  the  stating  of  the  duties  of  the 
various  officers  is  a  subject  that  should  receive  special 
attention  at  the  time  of  the  organization  of  every  cor- 
poration. 

By  properly  defining  the  powers  and  responsibilities 
of  each  officer  the  best  possible  results  are  obtained, 


DIRECTORS,  OFFICERS — DUTIES  AND  LIABILITIES.         83 

and  each  officer  has  a  certain  clearly-defined  responsi- 
bility ;  besides,  any  possibility  of  controversy  over  con- 
flicting authority  is  thereby  averted. 

The  compensation  of  both  directors  and  officers  is 
a  proper  question  for  the  directors  themselves;  it  is 
a  proper  subject  of  resolution  by  the  Board  of  Direct- 
ors, enacted  and  recorded  on  the  records  of  the  cor- 
poration prior  to  the  performance  of  the  service  in 
question,  and  unless  abused,  the  action  of  the  directors 
in  this  regard  is  final. 

Directors  are  not  entitled  to  compensation  unless 
it  is  expressly  provided  that  they  shall  receive  pay 
for  their  services;  and  a  salary  voted  to  a  director 
after  the  services  have  been  performed  is  voidable  by 
the  stockholders.  Directors  are  usually  vitally  inter- 
ested in  the  corporate  enterprise,  and  their  election 
as  directors  is  usually  due  to  that  fact.  A  director 
who  performs  extra  services,  outside  of  his  duties  as 
a  director,  however,  may  be  entitled  to  compensation 
therefor. 

The  established  rule  concerning  compensation  of 
directors  is  that  authority  for  its  payment  must  be 
obtained  without  fraud,  either  actual  or  constructive, 
and  that  the  amount  thereof  must  be  reasonable  for 
the  services  performed. 

A  salary  paid  to  directors  under  certain  circum- 
stances, e.  g.,  when  the  corporation  is  insolvent  or 


84         DIRECTORS,  OFFICERS — DUTIES  AND  LIABILITIES. 

financially  embarrassed,  or  where  the  amount  is 
excessive  or  paid  out  of  the  capital  of  the  corporation 
to  the  detriment  of  the  stockholders,  may  be  recovered 
from  the  directors  by  an  appropriate  proceeding. 

Another  familiar  principle  concerning  compensation 
of  directors  and  officers  alike  is  that  where  the  salary 
is  authorized  by  the  vote  of  the  party  receiving  it— 
that  is,  if  his  vote  is  necessary  to  its  creation — such 
compensation  is  illegal.  At  the  same  time  proper 
and  adequate  compensation  may  be  voted  directors 
and  officers,  and  the  amount  of  such  compensation 
must  be  governed  by  the  circumstances  of  the  particu- 
lar case. 

There  is  a  growing  disposition  among  legislators 
generally  to  increase  the  visitorial  power  of  the 
State  over  corporations,  and  to  this  end  require  cer- 
tain reports  to  be  made  by  officers  periodically  con- 
cerning their  affairs,  such  as  the  furnishing  of  names 
and  addresses  of  all  directors  and  officers;  whether 
the  corporation  is  availing  itself  of  the  privileges  con- 
ferred by  its  charter;  the  amount  of  the  capital  stock 
paid  in  since  its  organization,  etc.,  and  providing  cer- 
tain penalties  and  responsibilities  for  such  officers  for 
the  failure  to  comply  therewith.  In  addition  to  such 
penalties  imposed  by  the  State,  an  officer  may  be  held 
liable  to  the  corporation  for  any  injury  resulting  from 
his  negligence  or  failure  to  comply  with  such  laws; 


DIRECTORS,  OFFICERS — DUTIES  AND  LIABILITIES.         85 

and  generally  an  officer  may  be  held  liable  to  the  cor- 
poration for  all  negligence  or  fraud. 

Nearly  all  the  States  now  have  special  laws  regulat- 
ing foreign  corporations;  that  is,  where  corporations 
organize  in  one  State  and  undertake  to  do  business  in 
another,  in  the  latter  State  they  are  regarded  as  ' '  for- 
eign corporations. "  The  special  acts  of  the  various 
States  in  relation  to  such  foreign  corporations  are  far- 
reaching  in  their  effect,  as  will  be  seen  upon  reference 
to  the  copy  of  such  Act  now  in  force  in  the  State  of 
Illinois,  given  in  the  Appendix.*  It  will  be  observed 
that  in  Illinois  a  foreign  corporation  is  obliged  to  com- 
ply with  the  act  referred  to,  before  doing  business  in 
the  State.  What  constitutes  "  doing  business "  means 
the  establishment  of  a  local  agency  or  branch  for  the 
carrying  on  of  the  business ;  in  which  event,  it  is  neces- 
sary to  designate  some  person  upon  whom  service  of 
process  can  be  had  in  case  of  litigation,  and  to  other- 
wise comply  with  such  act.  Upon  the  failure  of  such 
foreign  corporations  to  comply  with  the  terms  of  such 
local  laws,  no  contract  can  be  enforced  by  it  in  the 
foreign  State;  and  it  has  been  held  in  Illinois  that 
subsequent  compliance  with  such  provision  of  the  law 
will  not  entitle  such  foreign  corporations  to  enforce  a 
contract  that  was  made  prior  to  such  compliance. 

*  Page    258. 


86  STOCKHOLDEBS'  BIGHTS  AND  LIABILITIES. 

The   functions   of   stockholders   in   a 

Stockhold- 
ers'   Rights    business    corporation   are   limited;   the 

and    Liabii-    general    and    principal    rights    of    the 
stockholder  are   (a),  to  form  the  cor- 
poration, or  bring  it  into  existence  in  the  first  instance ; 

(b)  to  elect  its  Board  of  Directors  from  time  to  time; 

(c)  to  make  its  by-laws,  unless  that  power  is  delegated 
to  the  directors;  (d)  to  increase  or  decrease  the  capital 
stock;  (e)  to  authorize  all  amendments  to  the  charter; 
(f )  to  participate  in  the  dividends ;  (g)  to  dissolve  the 
corporation ;  (h)  to  authorize  the  giving  of  mortgages, 
in  case  the  statutes  of  the  State  require  it;   (i)  to 
examine  the  books  and  records  of  the  corporation  at  all 
reasonable  times;   (j)  to  pass  upon  the  necessity  or 
advisability  of  the  sale  of  the  entire  business. 

The  liabilities  of  a  stockholder  are  even  less  than  his 
rights  as  such.  It  might  be  said,  if  the  corpora- 
tion is  regularly  and  legally  formed,  that  the  stock- 
holder's liabilities  are  limited  to  the  unpaid  portion — 
if  any — of  the  stock  held  by  him;  and  unless  the  laws 
of  the  State  under  which  the  corporation  is  formed 
are  complied  with  the  stockholders  are  liable  in  the 
same  manner  and  to  the  same  extent  as  partners. 

In  some  States  the  stockholder  has  a  liability  in 
addition  to  the  par  value  of  his  stock.  This  liability  is 
imposed  by  the  statutes  of  such  States.  Such  liability 
is  strictly  construed  by  the  courts  where  the  same 


STOCKHOLDERS'  EIGHTS  AND  LIABILITIES.  87 

exists,  and  it  is  now  confined  to  but  a  few  States,  and 
the  tendency  is  to  abolish  it  altogether. 

In  discussing  the  liabilities  of  a  stockholder,  they 
will  be  referred  to  in  the  order  in  which  they  naturally 
arise — that  is,  the  liability  of  an  original  stockholder 
for  any  unpaid  portion  of  the  stock  standing  in  his 
name,  and  in  connection  therewith,  the  liability  of  the 
transferee  of  such  stock. 

Most  of  the  States  hold  the  transferee  liable  jointly 
with  the  original  subscriber  or  owner  of  stock,  where 
the  same  has  not  been  fully  paid  for  at  the  time  the 
stock  was  issued. 

It  has  been  already  shown  that  stock  originally 
issued  upon  inadequate  consideration,  i.  e.,  where 
property  has  been  fraudulently  accepted  by  the  direc- 
tors in  exchange  for  stock,  or  where  the  value  of  the 
property  has  been  flagrantly  inflated,  is  not  thereby 
paid  for,  even  as  between  the  corporation  and  the 
seller,  notwithstanding  the  stock  certificate  upon  its 
face  purports  to  be  "  fully  paid  and  non-assessible." 
In  such  cases,  the  transferee  is  liable  jointly  with  the 
transferor  (especially  to  creditors  of  the  corporation) 
for  the  differences  between  the  value  of  the  property 
received  by  the  corporation  and  the  par  value  of  the 
stock  issued  therefor. 

Where  the  statutes  of  a  State  do  not  make  the  action 
of  the  Board  of  Directors  in  this  regard  final  in  any 


88  STOCKHOLDERS'  EIGHTS  AND  LIABILITIES. 

event,  the  above  mentioned  rule  applies  to  both  the 
original  owner  of  the  stock  and  any  subsequent  trans- 
feree; and  the  only  difficulty  in  determining  the  lia- 
bility of  a  subsequent  stockholder  in  such  a  case  is  to 
establish  sufficient  notice  to  the  transferee  of  unpaid 
stock,  or  to  determine  what  circumstances  or  state  of 
facts  will  constitute  legal  notice  that  the  stock 
accepted  by  him  is  not  fully  paid,  when  the  stock  cer- 
tificate recites  on  its  face  that  the  stock  thereby  rep- 
resented is  fully  paid  and  non-assessible. 

The  rule  laid  down  in  Illinois  is  that  an  exchange 
of  property  for  stock  in  a  corporation  must  constitute 
a  valid  contract  of  bargain  and  sale  in  good  faith  and 
by  the  result  of  honest  judgment  of  the  Board  of 
Directors  of  the  corporation  accepting  such  property, 
or  the  person  to  whom  such  stock  is  issued  is  liable, 
both  to  the  corporation  and  its  creditors  for  the  dif- 
ference between  the  actual  value  of  the  property  con- 
veyed and  the  face  or  par  value  of  the  stock  received ; 
and  as  to  what  constitutes  constructive  notice  to  a 
subsequent  purchaser  of  such  stock  may  be  illustrated 
by  a  leading  case  in  Illinois  on  that  question : 

A  corporation  was  organized  for  $1,000,000,  and  all 
its  stock,  excepting  two  shares,  was  issued  for  an 
interest  in  a  patent.  The  stock  certificates  issued  for 
this  invention  recited  on  their  face  that  the  capital 
stock  represented  thereby  was  "  fully  paid  and  non- 


STOCKHOLDERS'  EIGHTS  AND  LIABILITIES.  89 

assessible."  Some  of  this  stock  was  sold  or  conveyed 
to  a  third  party,  namely,  one  who  was  not  originally 
connected  with  the  organization  of  the  corporation. 
The  corporation  in  question  failed,  and  the  creditors 
instituted  appropriate  proceedings  for  the  purpose  of 
holding  the  assignee  of  such  stock  jointly  liable  with 
the  original  owner. 

In  holding  that  the  transferee  was  liable  as  con- 
tended, the  Supreme  Court  of  Illinois  said:  "It  is 
not  conceivable  that  a  person  of  ordinary  intelligence 
and  prudence  buying  shares  of  stock  in  such  a  cor- 
poration would  not  become  advised  as  to  what  prop- 
erty the  corporation  had.  *  *  *  It  is  clear  that 
appellees  knew  that  the  corporation  had  no  money  and 
no  property  aside  from  the  patent,  and  it  would  not  be 
creditable  to  them  to  say  that  they  believed  the  pat- 
ent to  be  worth  $999,800. "  *  *  *  "We  regard  the 
proof  as  establishing  the  fact  of  notice  to  appellees 
of  the  transaction  and  over-valuation.  They  knew 
that  the  corporation  did  not  have  a  paid-up  capital  of 
$1,000,000  and  that  *  *  *  had  not  paid  for  the 
stock,  unless  it  was  given  for  the  patent. " 

Hence  it  will  be  seen  that  not  only  the  original  sub- 
scribers of  stock  may  be  liable  for  any  unpaid  portion 
thereof,  but  that  in  many  cases  subsequent  owners  of 
such  stock  may  be  likewise  liable.  In  the  language  of 
the  Illinois  Supreme  Court:  "The  relation  of  the 


90  STOCKHOLDERS'  EIGHTS  AND  LIABILITIES. 

stockholder  who  has  not  paid  for  his  stock,  to  the  cor- 
poration or  the  creditors,  is  the  ordinary  one  of 
debtor. " 

The  presumption  is  that  a  corporation  has,  or  at 
some  time  had,  money  or  property  equal  in  value  to 
the  amount  of  its  capital  stock,  and  creditors  have  a 
right  to  presume  that  such  is  the  case ;  hence  the  issu- 
ing of  stock  for  less  than  the  par  value  is  ordinarily 
held  to  be  a  fraud  upon  the  law,  creditors  and  sub- 
sequent purchasers.  It  is  ultra  vires  of  the  corpora- 
tion to  issue  stock  for  less  than  its  face  value  in  money, 
and  creditors  (and  under  certain  circumstances  other 
stockholders)  may  insist  upon  the  balance  being  paid 
into  the  treasury. 

There  is  a  rule,  however,  that  where  a  corporation 
has  increased  its  capital  stock,  and  becomes  insolvent, 
it  may  then  issue  any  portion  of  such  increased  stock 
for  the  best  price  obtainable  and  no  one  will  be  liable 
therein,  especially  to  existing  creditors;  the  reason 
being  that  they  did  not  extend  credit  upon  the  in- 
creased capitalization. 

One  of  the  fundamental  principles  in  the  law  of  cor- 
porations is  that  the  majority  may  exercise  the  right 
to  control  the  corporation's  affairs.  This  right  has 
suggested  many  opportunities  for  the  perpetration  of 
fraud  upon  the  minority  stockholders,  and  the  re- 
peated instances  of  such  attempts  which  have  come 


STOCKHOLDEKS'  EIGHTS  AND  LIABILITIES.  91 

before  the  courts  of  last  resort  have  developed  a  sys- 
tem of  jurisprudence  for  the  protection  of  the  minority 
stockholder. 

Some  of  the  familiar  methods  of  attempting  to  take 
advantage  of  the  minority  stockholder  is  for  the 
majority  to  vote  large  salaries  to  themselves,  with- 
hold dividends,  incorporate  an  auxiliary  enterprise, 
and  favor  such  undertaking  at  the  expense  of  the 
parent  company,  and  various  other  devices,  which  all 
tend  to  the  same  result,  namely,  the  detriment  of  the 
minority  stockholder. 

Majority  stockholders,  through  directors  who  are 
their  tools,  often  perpetrate  such  wrongs  for  their 
direct  benefit.  The  dummy  director  is  now  an  old  de- 
vice in  the  law  of  corporations,  and  courts  of  equity 
are  inclined  to  look  behind  all  such  devices  to  ascertain 
the  real  parties  in  interest. 

The  language  of  the  United  States  Supreme  Court 
announces  the  modern  rule  in  relation  to  this  subject, 
to-wit:  "When  a  number  of  stockholders  combine  to 
constitute  themselves  a  majority  in  order  to  control 
the  corporation  as  they  see  fit,  they  become  for  all 
practical  purposes  the  corporation  itself,  and  assume 
the  trust  relation  occupied  by  the  corporation  toward 
its  stockholders. " 

While  courts  of  equity  will  interfere  for  the  protec- 
tion of  minority  stockholders,  they  will  not  undertake 


92  STOCKHOLDERS'  EIGHTS  AND  LIABILITIES. 

to  control  the  policy  or  business  methods  of  the  cor- 
poration, so  long  as  they  are  conducted  in  good  faith, 
although  it  may  be  seen  that  a  wiser  policy  might  be 
adopted,  and  the  business  more  successfully  conducted 
if  other  methods  were  pursued.  It  is  in  cases  of  fraud, 
or  where  some  undue  advantage  is  being  taken  of  the 
minority  stockholders,  that  courts  will  intervene  and 
afford  relief. 

It  is  not  infrequent  that  stockholders  undertake  to 
make  an  agreement  among  themselves  whereby  cer- 
tain policies  shall  be  carried  out;  that  is,  where  cer- 
tain individuals  shall  be  retained  in  office,  and  other- 
wise attempt  to  regulate  the  voting  of  stock,  and  in 
that  way  control  the  corporation. 

Another,  and  not  unusual  question,  is  that  of  limit- 
ing the  sale  of  stock  either  to  a  class  of  persons,  or  to 
give  one  another  the  first  opportunity  and  right  to 
purchase  stock  which  may  be  offered  for  sale.  All  of 
these  objects  are  difficult  to  accomplish,  for  the  reason 
that  they  are  fundamentally  against  public  policy. 

Any  contract  which  amounts  to  an  unreasonable 
restraint  of  trade  is  illegal — that  is,  where  the  contract 
attempts  to  perpetually  or  unreasonably  deprive  the 
stockholder  of  his  right  to  sell  or  control  stock,  or 
his  right  to  vote  thereon;  but  an  agreement  to  place 
stock  in  escrow  for  a  reasonable  time  to  accomplish  a 
lawful  purpose  or  to  insure  the  right  to  purchase  such 


STOCKHOLDEKS'  EIGHTS  AND  LIABILITIES.  93 

s\;ock  at  a  given  price  is  legal.  And  a  condition  in- 
serted in  the  body  of  the  stock  certificate,  regulating 
the  transfer  of  such  stock,  either  to  a  class  of  stock- 
holders, such  as  dealers  in  a  given  line  of  trade,  or  to 
existing  members  may  be  legal. 

In  addition  to  the  foregoing,  any  lawful  object  may 
be  accomplished  in  the  regulating  of  transfers  of  stock, 
but  as  before  intimated,  the  terms  employed  in  accom- 
plishing such  objects  must  necessarily  receive  care- 
ful attention. 

A  stockholder's  right  to  vote  upon  his  stock,  either 
in  person  or  by  proxy,  is*  necessarily  an  important  one. 
In  order  that  the  minority  stockholder  may  have  repre- 
sentation in  the  directory,  the  laws  of  most  States 
provide  what  is  termed,  " cumulative "  voting;  e.  g., 
where  the  number  of  directors  is  five,  and  the  stock- 
holder votes  his  shares  of  stock  under  the  cumulative 
system,  he  would  have  five  votes  for  each  share  of 
stock  held  by  him,  which  he  could  cast  for  one  director, 
or  divide  them  among  the  five,  as  he  may  choose. 

In  case  a  stockholder  cannot  be  present  at  the  meet- 
ing of  the  stockholders  of  his  corporation,  he  may 
appoint  a  proxy  (to  represent  him),  with  full  power  to 
exercise  all  the  rights  of  a  stockholder ;  a  proper  form 
of  such  proxy  will  be  found  in  the  Appendix.*  Such 
proxies  may  be  made  for  a  single  meeting  or  for  a 

*Fage   243 


94  BY-LAWS  AND  THEIB  USES. 

given  length  of  time,  and  until  acted  upon,  they  are 
subject  to  be  revoked  at  the  will  of  the  stockholder. 


By-La  ws  importance  of  a  proper  code  of 

and  Their     by-laws  for  the  government  of  a  cor- 
uses.  poration  cannot  be  overestimated.    They 

are  the  internal  law  for  the  government  of  the  cor- 
poration itself;  the  duties  and  powers  of  its  officers 
emanate  from  them,  and  the  rights  of  the  stockholders 
are  often  curtailed  or  enlarged  by  their  provisions. 

By-laws  may  not  contravene  any  provision  of  the 
charter  itself  or  the  laws  of  the  State  under  which  it 
owes  its  existence,  nor  the  common  law,  or  be  against 
public  policy  or  the  laws  of  the  land,  and  they  may 
not  be  inequitable  or  unjust  or  unreasonable  in  their 
nature. 

Aside  from  these  limitations  they  may  contain  any 
rule  or  provisions  that  the  framer  may  choose  to  in- 
corporate therein. 

It  is  always  wise  to  include  in  the  by-laws  of  a  new 
company  the  well-settled  rules  of  law  of  the  State  of 
its  creation,  governing  its  conduct  for  the  guidance 
of  the  directors  and  officers.  Frequently  it  is  desired 
that  the  duties  as  well  as  the  authority  of  each  officer 
should  be  clearly  and  minutely  denned  in  order  that  no 
conflict  between  such  officers  shall  occur,  and  this  is 


BY-LAWS  AND  THEIR  USES.  95 

always  to  be  commended  where  such  a  course  is  prac- 
ticable or  feasible,  but  in  small  companies  it  is  unwise 
to  burden  and  handicap  the  management  with  unneces- 
sary rules  which  would  interfere  with  the  conduct  of 
the  business  itself. 

Every  stockholder  and  officer  is  bound  by  the  lawful 
provisions  of  the  by-laws,  and  this  whether  they  ever 
consented  to  their  enactment  or  ever  knew  of  their 
existence,  but  there  is  a  different  rule  obtaining  in 
regard  to  the  public.  The  by-laws  of  a  corporation 
should  not  affect  strangers  dealing  with  the  corpora- 
tion, and  the  violation  of  a  rule  contained  in  the 
by-laws  will  not  relieve  the  corporation  from  liability  to 
third  persons.  At  the  same  time,  creditors  may  insist 
that  the  provisions  of  the  by-laws  shall  be  enforced, 
and,  of  course,  the  stockholders  have  the  same  right. 

Forfeitures,  fines  and  the  like  can  only  be  enforced 
through  and  in  accordance  with  the  by-laws,  unless 
there  are  statutory  provisions  therefor;  and  the  ques- 
tion of  a  stockholder's  right  to  vote  may  be — within 
certain  lawful  limits — regulated  thereby. 

It  is  impossible  to  suggest  an  arbitrary  or  " stock' ' 
form  of  by-laws,  as  the  exigencies  and  peculiar  con- 
ditions of  each  organization  must  be  taken  into 
account ;  but  the  form  of  by-laws  given  in  the  Appendix 
hereto,*  will  be  found  satisfactory,  or  to  contain  use- 

*  See  page  217. 


96  BY-LAWS  AND  THEIR  USES. 

ful  suggestions  in  the  preparation  of  such  by-laws  for 
any  ordinary  corporation,  particularly  where  it  is 
organized  under  the  laws  of  Illinois. 

In  the  organization  of  companies  under  the  laws  of 
the  various  States,  the  by-laws  should  be  drawn  in 
conformity  with  such  local  laws,  and  invariably  re- 
quire the  utmost  skill  in  their  preparation. 

The  right  to  make  by-laws  is  primarily  in  the  stock- 
holders of  the  corporation,  unless  that  power  is  dele- 
gated to  the  directors,  either  by  charter  provision  or 
statute  law  of  the  State  where  the  corporation  is 
created.  The  tendency  of  modern  legislators  is  to 
delegate  the  power  to  the  directors  of  the  corpora- 
tion, and  where  the  right  to  make  by-laws  is  vested 
in  the  directors,  either  by  statutes  or  by  the  stock- 
holders themselves,  the  directors  also  have  the  power 
to  amend  or  repeal  the  same. 

The  difference  between  the  by-laws  of  a  corpora- 
tion and  its  formal  resolutions  is  chiefly  the  perma- 
nency of  the  former.  While  both  are  subject  to  amend- 
ment or  repeal,  unless  the  power  to  act  upon  the  reso- 
lution is  limited  by  the  by-laws,  it  is  subject  at  all 
times  to  the  will  of  the  directors  or  stockholders,  as 
the  case  may  be.  For  this  reason,  it  is  customary  to 
make  the  question  of  compensation  of  officers  a  sub- 
ject of  special  resolution,  and  to  have  such  resolution 
embody  the  amount  of  the  compensation  to  be  voted, 


BY-LAWS  AND  THEIE  USES.  97 

and  to  conclude  with  the  phrase  "subject  to  the  fur- 
ther action  of  this  Board. "  The  purpose  of  this 
limitation  is  to  make  the  compensation  of  an  officer 
wholly  subject  to  the  will  of  the  Board  of  Directors — 
that  is,  to  leave  the  power  and  to  facilitate  the  right 
to  change  such  compensation  as  the  circumstances  may 
suggest. 

It  is  not  infrequent  that  the  directors  and  officers 
themselves  violate  or  ignore  important  provisions  of 
the  by-laws.  Where  this  has  been  done,  it  is  well  to 
ratify  the  acts  done  contrary  to  the  provisions  of  the 
by-laws,  where  the  same  are  not  contrary  to  the  in- 
terests of  the  corporation  itself.  Such  ratification 
may  be  accomplished  by  proper  resolution  adopted  by 
the  Board  of  Directors  in  meeting  assembled. 

It  should  be  borne  in  mind  that  the  by-laws  of 
every  corporation,  as  well  as  all  important  resolutions 
of  the  directors,  should  be  accurately  transcribed  upon 
the  Minute  Book  of  the  corporation,  and  preserved  in 
this  way.*  In  the  case  of  large  corporations  it  is  not 
infrequent  that  the  by-laws  are  printed  and  circu- 
lated among  the  members. 

*Under  the  law  of  some  jurisdictions  (South  Dakota,  for  instance),  by-laws 
are  not  operative  until  so  recorded. 


98     CORPORATE  RECORDS  AND  BOOKS  OP  ACCOUNT. 

The  books  of  account  that  are  peculiar 

Corporate 

Records  and  to  corporations,  and  not  in  use  by  gen- 
Books  of  AC-  eral  unincorporated  concerns,  are  few. 
count.  T}ley  consist  generally  of  the  Minute 

Book,  Stock  Certificate  Book,  Transfer  Book  and 
Stock  Ledger.  Aside  from  these,  it  is  not  unusual  for 
the  treasurer  to  have  a  Private  Ledger  in  which  to 
keep  Controlling  Accounts.  Besides,  it  is  customary 
for  all  modern  business  corporations  to  have  a  more 
strict  and  comprehensive  System  of  Accounting,  par- 
ticularly a  complete  Voucher  System,  by  which  an  ac- 
curate and  conclusive  accounting  can  be  furnished  of 
all  departments,  and  at  any  and  all  times,  for  the  bene- 
fit and  information  of  stockholders. 

The  statutes  of  a  few  States  of  the  Union  require 
other  corporate  books  to  be  kept,  known  as  Books  of 
Publicity,  but  they  are  the  exception. 

Perhaps  the  book  that  is  universally  conceded  to  be 
first  in  importance  among  those  peculiar  to  the  cor- 
poration is  its  Minute  Book — by  which  is  meant  the 
book  wherein  the  acts  and  proceedings  of  the  corpora- 
tion itself  are  recorded,  and  particularly  the  acts  that 
require  sanction  or  authority  from  the  Board  of 
Directors;  and  these  include  the  Eecord  of  the  Adop- 
tion, as  well  as  a  Transcript  of  the  By-Laws  and  their 
Amendments. 
[When  the  corporation  is  sufficiently  large  to  justify 


CORPORATE  RECORDS  AND  BOOKS  OF  ACCOUNT.     99 

it,  there  should  be  two  separate  Minute  Books,  one  for 
the  stockholders,  and  the  other  for  the  Board  of 
Directors,  in  which  to  record  the  meetings  and  pro- 
ceedings of  each. 

The  most  approved  and  convenient  plan  of  keeping 
the  Minute  Book  of  the  corporation  is  to  have  a  Certi- 
fied Copy  of  the  Charter  attached  to  the  first  page  of 
this  book,  or  to  have  the  secretary  copy  the  Charter 
verbatim  at  the  beginning  thereof.  Then  the  minutes 
of  the  organization  meetings  should  follow  in  their 
proper  order  and  dates. 

The  By-Laws  should  be  recorded  elsewhere  in  the 
Minute  Book,  preferably  at  the  back,  leaving  enough 
unused  pages  after  their  recording  to  insert  any  and 
all  amendments  that  may  be  made  to  the  By-Laws. 
After  this  the  minutes  of  each  succeeding  meeting 
should  be  recorded  as  they  occur,  following,  of  course, 
the  meetings  to  organize. 

It  is  not  necessary  that  the  minutes  of  meetings  be 
written  up  at  or  immediately  following  the  meeting  to 
be  recorded,  nor  is  it  necessary  that  the  minutes  be  in 
the  handwriting  of  the  secretary;  but  it  is  advisable 
that  the  minutes  of  every  meeting  should  be  promptly 
recorded  in  order  that  no  errors  or  omissions  may  be 
made,  and  in  every  case  they  should  be  signed,  at  least, 
by  the  secretary. 

Care  should  invariably  be  taken  to  preserve  all 


100    COKPOKATE  EECOEDS  AND  BOOKS  OF  ACCOUNT. 

documents  and  writings  coming  into  the  hands  of  the 
secretary,  such  as  proxies,  original  motions  and  reso- 
lutions that  have  been  reduced  to  writing  by  the  mem- 
ber offering  the  same.  After  such  documentary  rec- 
ords have  been  recorded  they  should  be  preserved  for 
future  reference  or  comparison. 

If  the  minutes  of  meetings  are  not  taken  in  short- 
hand, there  should  be  notes,  at  least,  made  of  all  im- 
portant transactions,  and  the  minutes  should  then  be 
written  up  from  such  notes. 

It  is  unquestionably  advisable  to  approve  the 
minutes  of  all  meetings  at  the  next  succeeding  regular 
meeting  of  the  body,  and  this  may  be  done  by  proper 
resolution  after  the  same  have  been  read;  but  the 
approval  of  the  minutes  of  a  regular  or  special  meeting 
of  a  Board  of  Directors  of  a  corporation  cannot,  in 
the  absence  of  a  special  call  being  made  therefor,  be 
amended  or  approved  at  a  subsequent  special  meeting 
of  the  same  body,  unless,  of  course,  all  directors  are 
present,  and  the  amendment  or  approval  is  unani- 
mously concurred  in. 

Erasures  should  never  be  made  to  correct  errors  or 
omissions.  The  approved  method  is  to  draw  a  red  line 
through  any  error  that  may  have  occurred  and  to 
insert  the  correction  directly  over  the  word  or  phrase 
corrected,  and  in  this  way  errors  may  be  corrected, 


COEPOKATE  RECORDS  AND  BOOKS  OF  ACCOUNT.    101 

and  the  manner  of  accomplishing  the  same  is  explana- 
tory of  all  resolutions  authorizing  such  corrections. 

In  supplying  omissions  from  minutes,  unless  the 
matter  omitted  is  too  voluminous,  it  should  be  inserted 
at,  or  near  the  point  of  omission  in  the  record;  but 
where  a  resolution  or  other  complete  transaction  has 
been  omitted,  then  it  is  advisable  to  make  a  separate 
entry  thereof,  either  at  the  bottom  of  the  page  where 
the  matter  omitted  should  have  been  originally  re- 
corded, or  in  any  convenient  place  in  the  Minute  Book, 
taking  care  to  make  a  note  of  such  omission  in  red  ink 
in  the  body  of  the  minutes  where  the  omission  oc- 
curred, calling  special  attention  to  the  omission  and 
where  the  matter  omitted  may  readily  be  found  in  the 
Minute  Book. 

The  Stock  Ledger  should  show  to  whom  the  capital 
stock  was  issued,  and  how  it  has  been  paid,  and  by 
whom.  This  ledger  can  be  made  self -balancing  by 
establishing  a  Controlling  Account  in  the  General 
Ledger,  entitled  "  Stock  Ledger  Balances, "  and  the  bal- 
ance of  which  will  show  the  standings  of  the  Stock 
Ledger  without  drawing  off  the  individual  accounts, 
the  net  balance  of  which  should  always  be  in  agree- 
ment with  that  of  the  controlling  account. 

It  is  the  custom  in  most  corporations  for  the  secre- 
tary, treasurer  or  some  confidential  employe  to  keep 
a  Private  Ledger,  provided  with  a  lock  in  which  are 


102    COEPOBATE  BECOEDS  AND  BOOKS  OF  ACCOUNT. 

kept  the  accounts  which  it  is  desired  shall  not  be 
accessible  to  the  regular  employes.  These  are  usually 
Capital  Stock,  Profit  and  Loss,  Loans  and  Investments, 
Personal  Drawing  Accounts,  Salaries,  and  any  special 
Accounts  of  a  Confidential  Nature.  A  Controlling  Ac- 
count is  then  opened  in  the  General  Ledger  entitled, 
" Private  Ledger,"  to  which  the  amount  of  the  net 
debit  or  credit  balance  of  these  accounts  is  posted  in 
one  item  at  the  close  of  each  month.  This  provides 
the  amount  necessary  to  complete  the  General  Trial 
Balance,  and  determine  whether  errors  have  been 
made  in  any  of  the  other  accounts,  besides  furnishing 
complete  protection  against  the  forcing  of  balances. 

In  some  companies,  the  controlling  account  in  the 
General  Ledger  is  dispensed  with,  the  list  of  Balances 
drawn  off  by  bookkeepers  at  close  of  the  month  being 
handed  to  a  person  keeping  the  Private  Ledger,  to 
which  he  then  adds  his  Net  Balance,  and  determines 
whether  or  not  the  general  books  are  correct. 

In  keeping  the  Stock  Certificate  Book  of  a  corpora- 
tion, care  should  be  taken  to  avoid  real  or  apparent 
over-issue  of  stock.  This  may  be  accomplished  by 
insisting  upon  a  proper  surrender  and  cancellation  of 
all  outstanding  certificates  at  the  time  of  a  transfer, 
by  observing  and  complying  with  the  usual  Blank 
Forms  provided  in  every  properly  worded  Stock  Cer- 
tificate Book,  and  by  making  proper  entries  of  all  pay- 


EXAMINATION    OF    BOOKS    AND    RECORDS.  103 

ments  and  transfers  of  stock  this  important  branch  of 
a  corporation's  accounting  may  be  easily  handled. 


investing  public  are  now  almost 
tion  of  Books    universally  demanding  an  Independent 
and   Bee-    Investigation  and  Report  On  the  Condi- 
tion and  Operative  Results  of  a  going 
business  before  seriously  considering  or  taking  any 
favorable  action  thereabout. 

Particularly  is  this  so  where  financiers  are  directly 
or  indirectly  concerned. 

The  cautious  business  man  also  demands  such  in- 
formation, and  the  seller,  or  party  desiring  financial 
assistance,  is  usually  ready  and  willing  to  furnish  such 
a  report  where  his  business  is  prosperous,  or  even 
solvent,  and  presents  a  reasonable  business  oppor- 
tunity. 

The  great  public,  or  quasi  public  corporations,  pub- 
lish annually  a  report  of  this  character  for  the  benefit 
of  their  stockholders. 

The  compilation  and  furnishing  of  this  important 
information  is  often  entrusted  to  audit  companies, 
whose  equipment  for  the  preparation  and  supplying 
of  such  reports  is  a  force  of  accountants. 

But  the  varying  conditions  and  vitally  important 


104  EXAMINATION    OF    BOOKS    AND    RECOKDS. 

questions  which  are  necessarily  met  in  the  compila- 
tion of  such  information  brings  the  most  important 
part  of  this  service — viz.,  suggestions  which  will  assist 
the  client  in  accomplishing  the  results  desired — out- 
side and  beyond  the  scope  and  qualifications  of  the 
accountant.  All  these  features  are  so  closely  allied 
to  the  work  of  the  corporation  lawyer,  who  is  experi- 
enced in  the  science  of  organization  and  the  conduct 
of  transactions  of  this  character,  that  a  combination 
of  the  two  undertakings  necessarily  proves  of  great 
advantage  to  the  client.  Hence,  the  larger  corpora- 
tions are  now  almost  universally  examined  under  the 
direction  of  legal  counsel. 

In  making  an  examination  of  corporate  books  and 
records,  the  Minute  Book  should  invariably  furnish 
evidence  of  the  authority  for  all  large  transactions 
outside  the  regular  course  of  business;  and  recourse  is 
necessarily  had  to  this  book  as  a  basis  for  an  intelli- 
gent examination  of  the  corporation's  transactions. 
Besides,  it  is  frequently  advisable  and  necessary  to 
determine  whether  the  corporation  is  exceeding  its 
authority  and  transacting  business  outside  the  scope  of 
its  Charter,  and  reference  for  this  purpose  is  neces- 
sarily had  to  the  Charter  or  Certificate  of  Incorpora- 
tion itself. 

Important  contracts  may  necessarily  have  to  be  con- 
strued in  order  to  ascertain  their  real  import.  Then, 


EXAMINATION    OF    BOOKS    AND    RECORDS.  105 

there  may  be  other  legal  objections  to  the  manner  of 
issuing  and  payment  of  stock  which  would  suggest 
themselves  only  to  one  versed  in  the  law,  and  which, 
if  discovered,  might  change  the  entire  aspect  of  af- 
fairs. Therefore,  a  proper  investigation  of  all  these 
matters  should  invariably  be  made  in  advance  of  the 
Audit,  whenever  it  is  desirable  to  have  an  Earnings 
Statement  to  interest  outside  capital,  or  for  reorgan- 
ization purposes. 

The  orderly  course  of  an  independent  examination 
of  corporate  books  and  records  is  to  first  examine  the 
Articles  or  Certificate  of  Incorporation.  This  will 
show  the  date  of  organization,  the  purposes  for  which 
the  company  was  organized,  the  amount  of  authorized 
capital  stock,  and  who  is  liable  for  its  payment. 

The  Minutes  of  the  Stockholders'  and  Directors' 
Meetings  should  then  be  taken  up.  This  record  will 
show  the  manner  of  incorporating,  the  consideration 
for  which  stock  has  been  issued,  how  the  original 
assets  were  acquired,  authority  for  all  extraordinary 
expenditures,  the  remuneration  of  officers,  the  au- 
thority for  all  dividends  paid,  and  the  warrant  for  the 
making  of  important  and  unusual  contracts  that  may 
be  entered  into  outside  the  general  course  of  busi- 
ness. 

The  Stock  Certificate  Book  and  Transfer  Journal 
are  then  examined  and  checked  against  the  Stock 


106  EXAMINATION    OF    BOOKS    AND    RECORDS. 

Ledger  to  determine  the  amount  of  the  capital  stock 
outstanding,  and  the  owners  thereof,  as  well  as  to 
guard  against  any  over-issue  of  stock. 

The  Trial  Balances  of  the  initial  and  terminating 
dates  of  the  Audit  contemplated  are  next  examined 
and  verified  with  the  Books  of  Account.  When  the  Bal- 
ance Sheets  of  either  or  both  dates  are  given  they 
should  be  carefully  examined,  particular  attention  be- 
ing given  to  the  closing  entries. 

In  all  examinations,  the  verification  of  the  Cash 
Accounts  is  of  controlling  importance.  While  the 
investigation  may  not  be  conducted  with  the  special 
object  of  detecting  fraud  or  shortages,  all  necessary 
precautions  are  to  be  taken  to  guard  against  the  pos- 
sibility of  such  irregularities  being  passed  over. 

The  count  of  Cash  on  Hand  is  taken  at  the  inception 
of  the  Audit,  and  a  detailed  list  made  of  all  Cash,  Cash 
Tickets,  Vouchers  and  Checks,  Money  Orders,  etc.,  on 
hand.  The  Bank  Deposit  Book  is  then  sent  to  the  bank 
to  be  balanced.  After  this  is  done,  the  Bank  State- 
ment and  Canceled  Checks  are  examined,  and  recon- 
ciliation made  with  the  Bank  Balance  as  shown  by  the 
company's  Cash  Book. 

In  cases  where  the  date  of  the  examination  is  sub- 
sequent to  the  closing  date  of  the  audit,  all  entries, 
footings,  and  bank  deposits  must  be  verified  for  the 
intervening  period.  The  cash  items  are  then  worked 


EXAMINATION    OF    BOOKS    AND    EECOBDS.  107 

back  by  adding  to  the  balance  the  disbursements,  and 
deducting  the  receipts,  which  should  give  the  correct 
balance  as  at  closing  date  of  audit. 

The  footings  of  the  Cash  Book,  general  and  sub- 
sidiary, for  the  entire  period  are  checked.  The  dis- 
bursements are  verified  by  the  Vouchers  supporting 
payments  both  as  to  payees  and  amounts.  On  the 
receipts  side,  the  cash  sales  are  checked  from  the 
records,  and  all  discounts  and  allowances  verified.  The 
remittances  are  checked  against  the  Ledger  accounts, 
and  the  total  receipts  of  each  day  against  the  bank 
deposits. 

The  footing  of  all  books  of  original  entry  must  be 
checked  and  postings  to  General  Ledger  verified. 

If  the  General  Ledger  contains  controlling  accounts 
with  subsidiary  ledgers,  these  must  be  in  perfect 
agreement.  Where  differences  are  found  to  exist  they 
must  be  located  and  corrected.  If  no  controlling  ac- 
counts are  kept,  they  must  be  constructed,  and  the 
balances  of  subsidiary  ledgers  verified  in  the  aggre- 
gate. 

All  cash  items  and  column  footings  must  be  checked 
from  General  Ledger  into  Cash  Book  and  afterward 
reviewed  to  see  that  all  this  class  of  items  are  cleared 
on  the  receipt  side  of  the  Cash  Book. 

The  postings  from  all  other  books  of  original  entry 
are  checked  into  the  General  Ledger.  Footings  of  all 


108  EXAMINATION    OF    BOOKS    AND    KECOBDS. 

accounts  in  the  General  Ledger,  open  and  closed,  must 
be  checked  for  the  entire  period  and  balances  verified. 

Sales  Books  are  footed  and  charges  verified  by  com- 
parison with  Original  Orders  and  Shipping  Eeceipts. 
Returns  and  Allowances  are  compared  with  Customers ' 
Correspondence,  Entries  in  Eeturn  Goods  Journal  and 
Stock-Keeper's  Eecords. 

Journal  entries  are  verified  by  supporting  Vouchers, 
which  must  all  show  proper  signatures  of  approval 
and  authorization. 

Voucher  Eecord  is  verified  by  comparison  with 
Original  Invoices.  All  Unpaid  Vouchers  are  listed,  the 
balance  showing  the  amount  outstanding,  which  should 
be  in  agreement  with  Accounts  Payable  in  General 
Ledger. 

Pay  Eolls  must  be  verified  as  to  extensions  and  foot- 
ings, and  be  signed  by  some  person  in  authority. 

Analyses  are  made  of  Profits  and  Loss  and  such 
Capital  and  Expense  accounts  as  may  be  deemed  neces- 
sary to  show  the  results  of  operations  of  business. 
Adjusting  Journal  entries  are  made  for  such  errors  and 
omissions  as  have  been  developed  in  the  course  of  the 
examination. 

In  the  verification  and  valuation  of  Assets  and  Lia- 
bilities, the  Title  Deeds  to  all  real  estate  should  be 
examined  and  compared  with  book  value  of  property, 


EXAMINATION    OF    BOOKS    AND    RECORDS.  109 

as  well  as  verification  with  amount   actually  paid. 
Proper  charge  for  any  depreciation  should  be  made. 

The  Plant  and  Machinery  Account  should  be  verified 
by  actual  examination  and  comparison  with  Original 
Invoices.  Care  should  be  taken  to  see  that  no  items 
which  should  properly  be  classed  as  Eepairs  and  Main- 
tenance are  charged  to  Additions  and  Betterments. 

Depreciation  may  be  charged  off  at  close  of  each 
fiscal  period,  the  percentage  being  such  as  to  finally 
reduce  the  cost  of  the  plant  to  its  residual  value  at  the 
date  when  it  is  estimated  it  will  have  to  be  replaced. 
Or,  another  method  is,  to  provide  for  the  depreciation 
of  a  plant  by  crediting  out  of  the  net  profits  for  the 
year — a  certain  fixed  percentage  of  the  cost  of  the 
plant  and  machinery  to  an  account  called  "Beserve 
for  Depreciation. ' '  This  maintains,  at  all  times,  a 
charge  on  the  Ledger  equal  to  the  actual  cost,  and  is 
believed  by  many  to  be  a  better  plan  than  charging, 
each  year  an  arbitrary  amount  on  account  of  depre- 
ciation. It  would  be  possible  to  ascertain  the  exact 
cost  of  the  plant  by  going  back  over  the  books  for  the 
period  and  ascertaining  how  much  had  been  charged 
each  year;  but  by  keeping  this  account  in  the  manner 
last  suggested,  the  actual  cost  is  known  and  the  depre- 
ciation is  provided  for. 

Patents,  Franchises,  Leaseholds,  etc.,  are  subject  to 
such  annual  depreciation;  and  the  conservative  plan 


110  EXAMINATION  OF  BOOKS  AND  RECORDS. 

is  to  charge  off  a  sufficient  amount  each  year,  so  as  to 
extinguish  their  value  at  the  time  of  expiration  of 
such  rights. 

Inventories  should  be  signed  by  the  parties  taking 
them,  and  verified  by  the  accountant  as  to  extensions 
and  footings.  Prices  must  be  cost  or  market,  which- 
ever lowest.  Goods  on  Consignment  must  be  stated 
separately.  All  Bonds,  Stocks  and  other  securities 
must  be  verified  by  actual  examination  and  valued  at 
cost  or  market,  whichever  lowest. 

Accounts  Eeceivable  must  be  examined  and  Delin- 
quent Accounts  listed.  A  reserve  for  these  must  be 
created  in  the  Liabilities,  and  set  up  on  the  Balance 
Sheet. 

Notes  Eeceivable  On  Hand  are  checked  with  Note 
Eegister  and  verified  by  actual  examination.  Notes 
Discounted,  but  not  matured,  are  verified  by  Certifi- 
cate with  Itemized  List  from  Bank,  for  which  a  Con- 
tingent Liability  is  set  up  on  Balance  Sheet. 

Notes  Payable  are  checked  against  Note  Eegister, 
and  if  deemed  necessary,  verified  by  communication 
with  holders.  Notes  Paid  are  verified  by  examination 
of  Cancelled  Notes.  Notes  Payable,  unmatured,  on 
which  the  company  are  indorsers,  must  be  set  up  as  a 
Contingent  Liability. 

Eeserves  for  discounts  and  all  unexpired  charges 
and  unmatured  obligations  must  be  provided. 


EXAMINATION  OF  BOOKS  AND  EECORDS.  Ill 

Adjusting  Journal  entries  must  be  made  to  set  back 
in  surplus  such  bad  debts  or  other  charges  as  properly 
belong  to  periods  previous  to  the  one  under  review. 

Following  is  a  list  of  exhibits  and  schedules  which 
should  be  prepared  in  order  to  furnish  a  <com- 
prehensive  report  to  stockholders  or  prospective  in- 
vestors : 

EXHIBITS. 

"A''  Comparative  General  Balance  Sheet,  showing 
Assets  and  Liabilities  with  Increase  or  Decrease  for 
period. 

"B"  Comparative  statement  of  Income,  and  Profit 
and  Loss  Accounts,  showing  percentage  of  various 
expenses  to  net  sales. 

SCHEDULES. 

No.  1.  Eeconciliation  of  Bank  and  Cash  Book 
Balances. 

No.  2.    Accounts  Eeceivable — City  Customers. 

No.  3.    Accounts  Eeceivable — Country  Customers. 

No.  4.    Accounts  Eeceivable — Sundry. 

No.  5.    Accounts  Eeceivable  in  Suspense. 

No.  6.    Bills  Eeceivable. 

No.  7.    Accounts  Payable — Purchase  Ledger. 

No.  8.    Accounts  Payable — Sundry. 

No.  9.     Bills  Payable. 

No.  10.  Comparative  Monthly  and  Yearly  Sales, 
with  percentage  of  Increase  or  Decrease. 


112  EXAMINATION  OF  BOOKS  AND  RECORDS. 

No.  11.  Comparative  Statement  by  months,  of 
General  Expenses  for  Period. 

No.  12.     Stockholders  of  Eecord. 

Further  detailed  statements  may  be  furnished  to 
accomplish  the  purpose  desired,  at  the  same  time 
certain  schedules  referred  to  may  be  omitted  within 
the  limits  of  a  complete  audit. 

One  of  the  important  prerogatives  of  a  stockholder 
in  a  corporation  is  his  right  to  examine  the  books 
and  records  of  the  corporation  in  which  he  is  a  stock- 
holder, and  this  he  may  do  by  himself,  or  counsel,  at 
any  and  all  reasonable  times  and  for  all  legitimate 
purposes. 

To  enable  him  to  avail  himself  of  this  privilege, 
the  law  will  compel  the  officers  of  a  corporation  to 
permit  such  examination  and  award  damages  for  its 
denial. 

The  extent  to  which  this  examination  may  go  is 
limited  by  the  circumstances  of  the  particular  case, 
depending  upon  the  nature  and  extent  of  the  business, 
as  well  as  its  condition. 


REORGANIZATION  AND  CONSOLIDATION 
OF  ENTERPRISES 


CHAPTER  IV. 

REORGANIZATION  AND   CONSOLIDATION   OF  ENTERPRISES. 

REORGANIZATION  —  POSSIBLE  ADVANTAGES  THEBEFBOM. 

CONSOLIDATION  OF  ENTEBPBISES. 

STOCK-JOBBING. 

The  title  selected  for  this  important 

Reorgani- 

zation— Pos-     subject   pre-  supposes    the    existence   of 


Advan-     two  necessary  conditions  :     First,  that 
tages  There-     ^  ^g^gg  ]^as  been  organized,  either 

from. 

as  a  corporation  or  otherwise;  and, 
second,  that  for  some  reason  it  is  deemed  necessary 
or  advisable  to  change  its  status  —  that  is,  the  manner 
of  doing  business,  if  not  its  very  foundation  and  con- 
ditions. The  manifold  advantages  of  a  corporate 
existence,  as  compared  with  the  unincorporated,  and 
the  mode  of  accomplishing  this  object  have  already 
been  discussed;  and  the  opportunity  to  illustrate  one 
of  the  chief  advantages  to  be  derived  from  the  cor- 
porate idea,  as  compared  with  the  unincorporated 
existence,  is  here  presented. 

Under  a  preceding  head  many  of  the  common  causes 
for  reorganization  have  been  given,  and  in  discussing 
the  various  practical  questions  arising  in  the  course 

(115) 


116  BEOKGANIZATION — POSSIBLE  ADVANTAGES. 

of  the  organization  and  conduct  of  business  corpora- 
tions, the  advantages  and  methods  of  accomplishing 
this  result  have  necessarily  been  suggested.  At  the 
same  time  a  separate  discussion  of  the  subject  of 
reorganization  and  its  possible  advantages  to  the  estab- 
lished business,  as  well  as  to  its  owners,  is  necessary 
in  order  that  many  of  the  principles  and  advantages 
discussed  may  be  illustrated  and  applied. 

A  business  venture  which  has  failed  to  attain  suc- 
cess may  often  be  reorganized  in  such  a  way  as  to  give 
it  the  vitality  it  requires,  and  the  lack  of  which  has 
been  the  cause  of  its  failure.  For  instance,  a  business 
which  has  struggled  along  under  a  faulty  organization 
in  the  first  instance,  may  be  the  subject  of  successful 
reorganization.  This  faulty  organization  may  be  due 
to  a  multitude  of  causes,  such  as  a  failure  to  provide 
sufficient  capital,  or  a  practical  way  to  acquire  it; 
unfavorable  location,  either  of  the  business  itself,  or 
an  unfavorable  State  for  the  creation  of  the  corpora- 
tion ;  or  some  legal  defect  in  the  incorporation  itself. 

In  any  and  all  of  these  cases  the  opportunity  for 
success  and  rehabilitation  is  limited  only  by  the  cir- 
cumstances of  the  particular  case,  and  the  skill,  under- 
standing and  effort  of  the  reorganizer. 

It  is  only  where  the  business  itself  is  a  commercial 
disaster,  or  impossible  of  practical  exploitation,  that 
failure  is  certain;  and  when  this  fact  is  ascertainable 


REORGANIZATION — POSSIBLE  ADVANTAGES.  117 

or  patent  from  an  honest  and  scientific  examination, 
it  is  then,  of  course,  wise  to  abandon  the  undertaking 
altogether. 

The  class  of  existing  and  going  concerns  which  are 
a  subject  for  reorganization,  and  where  the  greatest 
benefit  and  profit  may  be  derived  therefrom,  are: 
First,  the  established  concerns  which  are  making 
abnormal  returns  on  the  capital  employed;  second, 
where  it  is  the  desire  of  those  interested  in  the  per- 
manency and  continued  success  of  the  business  to 
show  their  appreciation  of  the  services  of  certain  em- 
ployes, such  as  department  heads,  and  to  afford  them 
recognition  in  the  business  itself.  They  will  be  dis- 
cussed in  their  order. 

What  is  meant  by  * '  abnormal  returns  from  the  capi- 
tal employed''  is  the  accumulation  of  net  profits 
annually  beyond  the  recognized  earning  power  of 
money;  that  is,  what  would  be  a  fair  rate  of  interest 
if  the  amount  employed  in  the  business  was  invested, 
and  similar  security  was  given  for  the  repayment  of 
the  principal  and  interest.  If  the  profits  of  a  busi- 
ness in  reality  average  in  excess  of  this  amount,  some 
action  should  be  taken,  either  to  reorganize  the  busi- 
ness so  as  to  increase  the  stock  holdings  of  the  owners 
of  the  business,  or  if  the  business  conditions  will  per- 
mit, increase  the  capital  stock  and  thereby  arrange 


118  BEOKGANIZATION — POSSIBLE  ADVANTAGES. 

to  bring  the  earning  capacity  and  the  relative  hold- 
ings of  the  members  into  harmony. 

It  is  the  universal  experience  of  all  that  the  sale 
of  unlisted  stocks  can  hardly  be  made  above  par; 
and  if  the  stock  has  an  earning  power  greater  than 
the  legal  rate  of  interest  it  is  in  reality  worth  above 
par. 

The  second  class  has  to  do  with  the  questions  of 
value  and  also  that  of  management.  Many  going  con- 
cerns have  been  placed  in  the  hands  of  department 
managers  by  allowing  them  to  have  a  great  or  small 
stock  interest ;  and  this  has  been  found  very  satisfac- 
tory to  all  concerned,  in  the  majority  of  cases. 

By  properly  re-valuing  the  busines  that  has  been 
established,  this  object  can  be  accomplished  with  com- 
paratively little,  if  any,  financial  sacrifice  by  the  own- 
ers. For,  invariably,  the  ordinary  employe  will  exert 
a  greater  amount  of  effort,  and  manifest  a  different 
kind  and  degree  of  interest  in  a  business  in  which  he 
has  a  financial  interest;  and  in  consequence,  the  busi- 
ness will  produce  greater  results,  and  the  earning 
capacity  and  value  of  the  stock  will  be  proportion- 
ately increased. 

The  following  case  will  show  many  of  the  advan- 
tages, as  well  as  the  errors,  that  may  occur  in  the 
reorganization  of  a  business,  and  at  the  same  time 


BEOKGANIZATION — POSSIBLE  ADVANTAGES.  119 

serve  as  an  illustration  of  many  of  the  principles  an- 
nounced : 

A  and  B  were  the  originators  of  a  manufacturing 
business  which  they  had  established  and  located  in 
a  suburban  town.  The  business  grew  from  a  mere 
shop  until  it  became  an  important  factor  in  their  line 
of  trade.  Finally  they  decided  to  "incorporate  the 
business"  and  to  that  end  formed  a  corporation — The 
A  &  B  Company— and  capitalized  it  for  $200,000. 
Upon  taking  the  inventory  of  the  assets  (the  first  ever 
made)  it  was  found  that  a  conservative  estimate  of  the 
value,  which  included  the  factory  site  of  ten  acres  of 
valuable  land,  was  in  the  neighborhood  of  $180,000; 
besides,  the  bills  and  accounts  receivable  and  cash  on 
hand  amounted  to  about  $100,000  additional.  Inas- 
much as  A,  B  and  C  (B's  son-in-law)  would  own  all 
of  the  stock  of  the  corporation  to  be  formed,  they 
considered  it  immaterial  that  the  value  placed  upon 
the  assets  so  greatly  exceeded  the  capitalization,  and 
transferred  the  property  to  the  new  corporation  in 
exchange  for  its  capital  stock. 

In  about  three  years  A  died  and  it  became  neces- 
sary in  the  administration  of  his  estate  to  sell  his 
stock  in  the  A  &  B  Company.  The  corporate  books 
showed  an  average  net  earning  for  the  three  years 
of  about  9%  on  the  capitalization  and  tangible  assets 
aggregating  about  $290,000.  But  notwithstanding  this 


120  BEORGANIZATION — POSSIBLE  ADVANTAGES. 

favorable  showing,  it  required  diligent  effort  under 
the  circumstances  to  find  a  purchaser  for  all  of  A's 
stock  at  par.  D,  a  banker,  was  the  purchaser,  and  he 
bought  A's  stock  as  an  investment. 

The  entire  capital  stock  of  the  A  &  B  Company 
was  now  owned  by  B,  C,  and  D,  the  banker.  B  was 
getting  along  in  years  and  desired  to  retire  from  active 
business  life.  C  was  an  "office  man"  and  not  familiar 
with  the  manufacturing  details  of  the  business,  and, 
as  before  stated,  D  was  otherwise  engaged  and  had 
no  experience  in  or  desire  to  become  actively  identi- 
fied with  the  manufacturing  end.  Finally  it  was  de- 
cided to  give  three  of  the  old  employes  an  oppor- 
tunity to  become  financially  interested  in  the  business 
and  to  make  them  officers  of  the  corporation  as  well. 

Upon  due  consideration  it  was  now  found  advisable 
to  reorganize  the  corporation  and  adjust  the  values 
and  property  rights  of  those  already  interested  in 
order  that  the  new  members  might  be  admitted  and 
place  the  business  in  a  permanent  and  practical  form 
for  future  operations. 

The  new  corporation  was  capitalized  at  $350,000, 
and  the  plant,  tangible  assets  and  good  will  of  the  A 
&  B  Company  were  transferred  to  it  in  exchange  for 
$315,000  of  its  stock.  The  three  employes  named 
were  then  sold  outright  $2,000  each  of  the  new  stock 
at  par  and  given  a  contract  whereby  they  would  re- 


BEOKGANIZATION POSSIBLE  ADVANTAGES.  121 

ceive  an  increase  in  salary  amounting  to  $8,000  each, 
to  be  accumulated  inside  of  a  given  period  should  they 
remain  in  the  company's  employ  during  that  time, 
and  to  have  stock  issued  to  them  annually  in  lieu  of 
money  for  such  yearly  increase. 

The  former  factory  site  was  then  sold  for  $40,000 
cash  and  a  new  location  with  twenty-five  acres  of  land 
was  obtained  as  a  bonus  from  a  town  (more  favorably 
located)  where  such  a  manufacturing  industry  was  de- 
sired. The  plant  was  modernized  and  enlarged  with 
the  proceeds  of  the  sale  of  the  former  factory  site  and 
the  business  was  then  reorganized  upon  a  more  mod- 
ern practical  basis. 

As  a  result  of  this  reorganization,  B  had  $140,000 
of  stock  in  the  new  corporation ;  C  $25,000 ;  D  $150,000, 
and  the  three  employes  had  $2,000  each  issued  to  them. 
This  left  $29,000  of  unissued  stock  in  the  treasury, 
$24,000  of  which  would  be  transferred  to  the  employes 
named  as  an  increase  of  salary  and  to  create  a  per- 
sonal interest  among  those  charged  with  the  actual 
operation  of  the  plant. 

At  the  expiration  of  some  two  years  the  entire  stock 
of  this  new  corporation  was  purchased  by  a  syndicate 
of  capitalists  for  the  purpose  of  turning  it  over  to  a 
"trust"  in  that  line  at  25%  above  the  par  value.  The 
inventory  that  was  then  made  and  the  earning  state- 
ment for  the  period  showed  that  the  net  profits  of 


122  REOKGANIZATION  -  POSSIBLE  ADVANTAGES. 


the  business  were  about  11%%  on  the  increased  capi- 
talization, as  against  9%  on  the  old,  and  this  with  the 
same  business  and  practically  the  same  management. 

Another  illustration  presenting  a  different  phase 
of  the  question  involved  is  where  two  separate  and 
competing  corporations  (which  for  convenience  will 
be  designated  as  A  Company  and  B  Company)  de- 
cided to  join  forces  and  interests  under  one  head.  To 
accomplish  this  purpose  A  Company  changed  its  name 
to  include  that  of  the  B  Company  and  increased  its 
capital  stock  so  as  to  permit  the  purchasing  of  the 
business  of  B  Company  with  such  increased  stock. 
The  various  stock  and  financial  complications  and 
entanglements  of  both  corporations  were  of  such  a 
nature  that  the  new  consolidation,  when  accomplished, 
presented  an  object  lesson  of  many  of  the  most  trouble- 
some conditions  to  be  met  with  in  corporate  affairs. 

The  working  capital  proved  to  be  insufficient  and 
the  increased  stock  remaining  in  the  treasury  was 
offered  for  sale.  Many  prospective  purchasers  were 
found,  but  upon  investigation  into  the  complicated 
conditions  of  the  company's  organization  and  affairs 
they  all  declined  to  purchase  the  stock  in  the  treasury. 
Finally  (and  as  a  last  resort),  the  stock  was  offered 
to  the  customers  and  employes  of  the  surviving  cor- 
poration and  much  of  it  was  sold  on  '  l  easy  payments  '  ' 
or  on  installments,  with  the  result  that  after  strug- 


BEORGANIZATION — POSSIBLE  ADVANTAGES.  123 

gling  along  for  less  than  a  year  a  complete  reorganiza- 
tion was  found  necessary  and  undertaken. 

The  conditions  that  confronted  the  reorganizers 
may  be  included  in  the  following  general  statements, 
viz:  faulty  organization  of  A  Company  and  inflated 
valuation  of  assets,  both  at  the  inception  of  the  two 
undertakings  and  at  the  time  of  taking  over  B  Com- 
pany's property  by  A  Company;  stock  hypothecated 
as  collateral  for  individual  loans  of  stockholders; 
dividends  had  been  declared  which  impaired  the  capi- 
tal ;  the  corporate  records  had  not  been  properly  kept 
and  the  by-laws  had  never  been  adjusted  to  meet  con- 
ditions existing  after  the  consolidation;  much  of  the 
increased  stock  had  not  been  paid  for  and  no  means 
could  be  found  of  enforcing  such  payments ;  the  stock 
of  the  company  was  scattered  to  the  "four  winds " 
and  much  of  it  could  not  be  obtained  for  reorganiza- 
tion purposes ;  a  large  list  of  creditors  were  insisting 
upon  payments  of  their  claims;  a  "blanket  mortgage " 
had  been  given  the  bank  to  secure  it  for  current  finan- 
cial accommodations,  etc.  In  consequence,  failure  was 
inevitable,  and  what  in  reality  was  a  profitable  and 
promising  industry  became  a  fit  subject  for  a  court  of 
bankruptcy,  where  the  same  was  sold  in  bulk,  and 
thereafter  became  successfully  reorganized  by  eliminat- 
ing practically  all  of  the  stockholders  of  both  A  and  B 
Companies,  which  meant  a  total  loss  to  them. 


126  CONSOLIDATION    OF   ENTEBPKISES. 

of  view,  as  well  as  from  a  sentimental  or  personal 
standpoint. 

It  has  been  aptly  said  that  an  ideal  social  condi- 
tion would  be  that  in  which,  in  every  department  of 
industry,  there  should  be  one  great  corporation  work- 
ing with  its  possible  economies  and  compelled  to  give 
to  the  public  the  full  benefit  of  those  economies,  and  to 
accept  in  return  a  reasonable  rate  of  interest  upon  the 
actual  capital  employed. 

While  it  will  be  universally  conceded  that  such  a 
condition  does  not  yet  exist,  it  must,  however,  be  ad- 
mitted that  the  public,  employer,  and  employe  have 
almost  universally  derived  substantial  advantages 
from  the  majority  of  consolidations  which  have  here- 
tofore taken  place.  And  it  may  safely  be  expected 
that,  with  a  more  intimate  acquaintance  and  under- 
standing of  these  questions  by  the  public,  and  a  rea- 
sonable State  or  National  control  over  great  industrial 
combinations,  a  practical  solution  of  the  "  trust 
abuses "  will  be  at  hand;  i.  e.,  welcome  centralization, 
but  repress  total  monopoly — extortion. 

It  is  doubtful  when  and  where  the  advantage  of 
monopoly  in  business  was  first  discovered;  certainly 
few  successful  enterprises  have  been  found  where  the 
element  is,  or  has  ever  been  wholly  absent.  It  will  be 
found  to  exist  in  some  form  or  other,  either  in  the 
shape  of  patents,  trademarks,  trade  names,  or  pecul- 


CONSOLIDATION  OF  ENTERPEISES.  127 

iar  characteristics  and  features  adopted  by  the  manu- 
facturer of  an  article  of  trade  which  distinguishes  it 
from  all  others  of  a  similar  nature.  These  and  other 
species  of  monopoly  are,  and  have  been,  the  common 
objects  of  all  successful  enterprises. 

One  might  as  well  undertake  to  compete  with  a  rival 
up-to-date  manufacturing  concern  without  the  aid  of 
any  of  the  modern  machinery  or  facilities  commonly 
employed  as  to  wholly  disregard  the  advantages  that 
may  be  derived  from  centralization  of  effort  and  capi- 
tal. 

The  statutes  of  the  State  must  be  strictly  followed 
in  effecting  a  consolidation  of  corporations;  and  in 
case  the  plan  of  reorganization  or  re-incorporating 
is  adopted,  what  has  been  said  in  relation  to  the  sub- 
ject elsewhere  will  apply  as  well  here,  and  therefore 
need  not  be  repeated. 

There  is  always  present  the  important  questions  of 
plans  of  procedure,  etc.,  which  have  been  referred  to 
throughout,  and  they  should  engage  the  particular 
attention  of  a  competent,  experienced  corporation 
lawyer. 

It  is  frequently  important  that  a  corporation  should 
be  legally  and  formally  dissolved  upon  the  sale  of  all 
its  assets  to  a  rival  corporation,  or  to  one  formed  for 
the  purpose  of  consolidation. 

A  corporation  can  only  be  dissolved  by  expiration  of 


128  CONSOLIDATION    OF   ENTEEPKISES. 

a  time  limit  for  corporate  existence  granted  in  the 
charter  (and  in  some  States  several  years  thereafter) 
by  decree  of  a  court  of  competent  jurisdiction;  by 
voluntary  act  of  the  corporation  itself  in  accordance 
with  forms  prescribed  by  the  laws  of  the  State  of  its 
creation,  and  where  the  charter  is  granted  directly 
by  the  Legislature  of  a  State,  it  may  be  repealed  and 
annuled  by  such  Legislature. 

It  is  sometimes  prescribed  by  statutes  (as  in  Illi- 
nois) that  the  failure  to  file  certain  reports  with  the 
Secretary  of  State  will  work  a  forfeiture  of  the  char- 
ter, or  that  the  Secretary  of  State  may  arbitrarily 
cancel  such  charter  upon  the  failure  of  such  corpora- 
tion to  comply  with  the  acts  in  question,  but  this  is 
not  lawful,  unless  in  accordance  with  the  Constitution 
and  express  wording,  and  reservation  of  such  power 
in  the  statutes ;  without  which  the  Secretary  of  State 
has  no  such  power. 

Unless  some  one  of  the  above  general  conditions 
has  been  complied  with,  the  corporation  lives  on,  re- 
gardless of  all  other  questions,  and  the  subscribers  to 
the  capital  stock,  or  stockholders,  may  be  called  upon 
at  any  time  for  any  latent  and  unintended  liability 
that  may  exist  or  arise. 

The  statutes  of  the  various  States  prescribe  the 
mode  of  voluntary  dissolution  of  corporations,  and 
these  must  be  strictly  followed.  They  usually  require 
the  consent  of  the  stockholders,  or  a  large  majority  of 


STOCK-JOBBING.  129 

them  (usually  two-thirds),  to  such  dissolution,  and 
that  the  question  shall  be  voted  upon  formally  by 
such  stockholders  at  a  meeting  regularly  and  formally 
called  in  accordance  with  such  statutes. 


The  most  conspicuous  abuse  of  the 
stock  Job-    C0rp0ra{.e    pjan    Of    conducting    enter- 

bing. 

prises  is  the  creation  of  trusts  and 
monopolies  for  the  purpose  of  extortion  and  enforced 
subjugation.  Immediately  following  this  modern 
crime  against  society,  is  the  more  subtle  and  illusory 
perversion  of  the  opportunities  conferred,  viz.,  ' '  stock- 
jobbing." 

The  motives  that  prompt  the  commission  of  the 
offense  first  above  referred  to  might  be  properly  de- 
nominated greed  and  a  reckless  disregard  for  the 
rights  and  welfare  of  others;  while  the  impulse  that 
suggests  and  contributes  to  the  achievement  of  the 
latter  is  obviously  dishonesty. 

What  may  and  may  not  constitute  stock-jobbing  is 
a  relative  question,  but  the  meaning  of  the  term  as 
here  alluded  to  is  the  issuing  of  stock  for  fictitious 
or  grossly  inflated  values,  and  the  creation  of  corpora- 
tions for  ulterior  purposes,  such  as  the  collection  of 
funds  from  the  sale  of  stock  for  the  ostensible  pur- 


130  STOCK-JOBEING. 

pose  of  promoting  an  enterprise,  while  in  fact  the 
money  thus  acquired  is  to  be  used  for  the  personal 
benefit  of  the  organizers  themselves. 

Another  and  less  flagrant  class  of  transactions 
which  fall  within  the  definition  of  the  term  here  con- 
sidered are  those  enterprises  which  are  capitalized 
for  an  exorbitant  and  unreasonable  amount  for 
various  reasons,  among  them  being  the  desire  to  offer 
the  stock  of  such  a  company  at  a  discount  for  the  pur- 
pose of  inducing  the  inexperienced  to  buy  it,  and  to 
gratify  the  visionary  individual  who  may  be  behind 
the  enterprise. 

In  order  to  illustrate  the  possibilities  and  effects  of 
issuing  stocks  upon  fictitious  and  inflated  values  of 
property  transferred  to  the  corporation  at  the  time  of 
its  creation,  one  has  only  to  investigate  the  inside  his- 
tory of  many  (if  not  a  large  majority)  of  our  large 
industrial  enterprises  formed  within  the  past  few 
years,  and,  in  fact,  many  of  our  railroads  are  reported 
to  be  capitalized  "in  the  air,"  so  to  speak.  In  1905 
the  capital  stock  of  all  the  railroads  of  the  United 
States  amounted  to  $6,741,956,825,  and  the  total  lia- 
bilities, except  current  accounts  and  sinking  funds, 
amounted  to  $14,765,178,704.*  Should  these  figures  be 
applied  to  an  individual  or  single  business  enterprise 
the  conditions  would  not  be  regarded  with  favor  by 

•Figures  taken  from  Report  for  1905,  U.  S.  Bureau  of  Statistics. 


STOCK-JOBBING.  131 

financiers,  for  while  the  cost  or  value  of  properties 
are  not  available  (except  an  estimate  of  some 
$12,000,000,000),  it  is  assumed  that  the  total  amount 
of  capitalization  reflects  a  liberal  valuation  on  the 
tangible  assets  at  least  of  these  properties,  and  if  this 
is  a  correct  premise,  then  the  chief  assets  are  the 
franchises  and  intangible  rights  which  depend  upon 
continued  operation  for  their  value.  In  brief,  the  rail- 
roads are  financed  upon  their  probable  earning  capa- 
city, rather  than  upon  substance,  and  while  this  might 
reasonably  be  regarded  as  legitimate  and  proper 
financing  in  this  class  of  enterprises,  if  the  same 
principles  were  applied  to  individual  industries,  they 
would  be  regarded  as  stock- jobbing. 

In  the  recent  combinations  of  industrial  enterprises 
many  instances  may  be  found  where  the  capital  stock 
represents  a  generous  valuation  of  the  properties  con- 
solidated, while  the  bonded  indebtedness  of  these  con- 
cerns is  equal  to,  and  in  many  cases  greater,  than  the 
capitalization;  hence  if  both  bonds  and  stocks  have 
been  sold  and  are  outstanding  and  being  held  by  in- 
vestors, this  form  of  property  represents  a  large  per- 
centage of  our  present  floating  securities. 

The  foregoing  is  but  illustrative  of  the  abuses  of  the 
corporate  system  perpetrated  in  the  higher  realm  of 
financiering  for  the  purpose  of  drawing  capital;  and 
the  ethical  responsibility  for  the  ultimate  repayment 


132  STOCK-JOBBING. 

of  the  money  thus  secured  rests  upon  those  who  have 
inaugurated  the  plans  adopted,  as  well  as  upon  those 
who  have  knowingly  assisted  in  carrying  such  plans 
into  effect. 

Where  financial  assistance  is  sought  in  every-day 
business  affairs  it  is  the  exception  rather  than  the 
rule  that  enterprises  are  able  to  acquire  such  assist- 
ance except  upon  establishing  their  financial  merit, 
and  this  must  be  based  upon  material  wealth.  The 
experienced  financier  would  not  regard  with  favor  the 
application  of  an  enterprise  that  was  involved  in  a 
bond  issue  to  the  extent  of  its  responsibility,  when 
viewed  from  the  material  standpoint.  In  other  words, 
the  principles  adopted  by  "high  financiers, "  who  are 
responsible  for  floating  the  securities  which  have  been 
issued  by  railroads  and  industrial  enterprises  within 
the  past  few  years,  would  not  be  the  basis  upon  which 
financial  assistance  could  regularly  be  obtained.  While 
a  more  liberal  rule  necessarily  obtains  in  the  capital- 
ization of  enterprises  than  that  adopted  by  banks  and 
financiers  generally  in  extending  commercial  credit, 
still  the  basis  for  a  sane  valuation  is  in  principle  the 
same. 

It  is  not  the  purpose  here  to  condemn  or  defend  the 
transactions  which  now  constitute,  in  a  measure  at 
least,  the  material  for  a  general  history  of  modern 
American  finance,  but  to  illustrate  what  appears  to  be 


STOCK-JOBBING.  133 

erroneous  and  prejudicial  theories  for  the  financial 
foundation  of  a  business  enterprise. 

We  must  assume  that  the  vast  majority  of  the  busi- 
ness of  the  future  will  be  transacted  by  and  through 
the  corporate  system,  and  it  would  seem  that  in  the 
light  of  recent  events  no  greater  service  could  be  ren- 
dered to  those  who  are  engaged  in  the  "game  of  busi- 
ness, "  than  to  impress  them  with  the  responsibilities 
and  ultimate  consequences  of  their  methods.  While  it 
is  conceded  that  the  moralists  are  the  individuals 
most  concerned  with  discourses  on  ethics  and  moral 
sentiment,  still  no  vocation  can  wholly  disregard  ques- 
tions that  involve  its  reputation  as  a  respectable  and 
honorable  occupation. 

Business  is  now  the  principal  occupation  of  society; 
it  furnishes  the  means  of  livelihood,  and  financial  as 
well  as  social  advancement,  for  a  great  majority  of 
mankind.  In  the  process  of  evolution,  which  business 
is  now  and  necessarily  must  continue  passing  through, 
it  is  imperative  that  those  who  are  concerned  about  its 
future  should  take  heed  of  certain  inevitable  conse- 
quences of  what  is  recognized  to  be  a  violation  of  the 
law  of  natural  right.  The  Socialist  now  sees  the  end 
of  "  class  privileges  and  individualism "  in  the  wake  of 
our  present  commercialism;  while  the  individualist 
hopes  and  believes  that  only  the  ethical  improvement 
of  mankind  will  work  out  the  destiny  of  this  modern 
dominant  force. 


134  STOCK-JOBBING. 

Social  scientists  tell  us  that  the  corporation  is  fos- 
tering, if  not  responsible  for  our  oppressive  trusts 
and  monopolies ;  that  without  this  institution  we  would 
have  free  competition  with  its  attending  benefits.  On 
the  otner  hand,  these  same  scientists  admit  that  com- 
petition promotes  "commercial  cannibalism";  there- 
fore, it  may  be  seen  that  any  attack  upon  a  system  of 
accomplishing  a  given  end  cannot  be  effective,  and 
that  after  all,  the  motives  of  the  individuals  rather 
than  the  system  under  which  they  operate  are  essen- 
tially of  controlling  importance. 

It  is  folly  to  lay  the  blame  of  unjust  or  oppressive 
conduct  upon  corporations;  while  they  are,  according 
to  the  predominant  "fiction  theory",  a  legal  entity 
they  are  without  moral  or  mental  qualities — conscience, 
feeling  or  moral  responsibility — and  should  not  be 
chargeable  with  the  acts,  conduct  or  motives  of  their 
stockholders,  directors  or  officers  who  control  their 
policies  and  their  every  act ;  and  no  system  of  laws  for 
the  national  or  state  control  of  corporations  will  make 
the  individuals  composing  them,  fair,  equitable  or  just. 

The  subject  of  over-capitalization  has  already  been 
discussed;  in  the  succeeding  chapter  further  illustra- 
tions are  given  of  this  and  other  abuses  of  corporate 
privileges  which  are  so  intimately  connected  with  the 
subject  in  hand. 


PROMOTION  OF  ENTERPRISES 


CHAPTER  V. 

PROMOTION  OF  ENTERPRISES. 

PROMOTERS. 

PROMOTION  CONTRACTS. 

GOOD  WILL— TRADEMARKS  AND  TRADE  NAMES. 

PATENTS  AND  THEIR  COMMERCIAL  VALUI. 

MINING  ENTERPRISES. 

According  to  Webster,  a  promoter  is 
"One  who  sets  on  foot  and  takes  the 
preliminary  steps  in  a  scheme  for  the  organization  of 
a  corporation,  a  joint  stock  company,  or  the  like." 
Assuming  this  definition  to  be  correct,  there  are  few 
men  who  have  not,  at  some  time  or  other,  acted  the 
part  of  a  promoter.  At  the  same  time,  there  are 
many  persons  who  would  resent  being  called  a  pro- 
moter, even  of  a  single  undertaking. 

This  prejudice  is  due  primarily  to  the  fact  that  the 
nature  and  opportunities  of  the  business  have  at- 
attracted  so  many  visionary,  irresponsible  and  (we 
believe  we  are  justified  in  adding)  dishonest  persons. 
In  fact,  the  confidence  man  is  not  a  stranger  to  this 
field  of  activity. 

But  it  is  as  unjust  and  unwise  to  condemn  pro- 
US?) 


138  PEOMOTEES. 

moters  as  a  class,  because  frequently  a  "  Colonel  Sell- 
ers "  or  a  "confidence  man"  has  been  found  among 
them,  as  it  would  be  to  condemn  our  National  currency 
on  account  of  the  discovery  of  an  occasional  counter- 
feit. In  both  cases  the  spurious  is  more  frequently 
discovered  among  the  smaller  l '  denominations, ' '  and 
the  reason  is  apparent. 

Promoting,  as  a  profession,  was  begun  in  London. 
A  prominent  commercial  publication  contained  the 
following  interview  with  one  of  the  first  of  this  pro- 
fession to  attract  attention  in  the  field  of  consolidating 
industrial  enterprises : 

' '  Months  and  months  of  the  hardest  kind  of  work  is 
necessary  to  float  these  great  concerns.  People  are 
incredulous,  and  it  is  hard  to  win  them  over.  Some 
want  more  than  the  actual  value  of  the  property 
sought.  It  takes  more  than  ordinary  persuasion  to 
convince  holders  of  property,  stocks  or  bonds  that  it 
is  best  for  them  to  sell,  or  become  a  party  to  a  proj- 
ect, whatever  it  may  be. 

"I  take  hold  of  nothing  until  I  am  convinced  that 
success  is  certain.  I  then  interest  the  practical  men 
of  the  different  concerns  to  be  consolidated;  these 
practical  men  agree  with  me  to  take  three-fourths  of 
the  stock.  Next,  I  interest  capitalists  in  the  remaining 
one-quarter  of  the  stock.  Only  those  who  are  best 
adapted  are  put  at  the  head  of  the  institution  as 


PROMOTERS.  139 

officers  and  directors.  That  insures  the  strictest 
economy  and  highest  efficiency  in  the  management  of 
affairs.  Then,  after  the  company  has  been  floated,  I 
keep  a  sharp  watch  over  operations. 

"I  have  turned  down  dozens  of  offers  for  my  serv- 
ices in  promoting  new  companies. ' ' 

It  was  an  English  promoter  who  conceived,  or 
rather  demonstrated,  the  plan  of  consolidating  a  num- 
ber of  properties  in  a  certain  line  of  manufacture, 
without  the  necessity  of  money  entering  into  the  trans- 
action— at  any  rate,  to  any  considerable  extent.  As 
the  plan  has  been  adopted  in  this  country  in  so  many 
important  instances,  it  is  deemed  worthy  of  attention. 

The  following  is  a  quotation  from  an  article  appear- 
ing in  a  leading  commercial  magazine,  published  upon 
the  first  " exposure "  of  the  plan: 

"A  &  Company  were  manufacturers  of  shoes,  and 
their  business  showed  a  net  earning  capacity  of  10% 
on  the  estimated  value  of  their  plant,  to- wit:  $1,000,- 
000;  B  &  Company,  also  shoe  manufacturers,  showed 
a  net  earning  capacity  of  1%  on  the  value  of  their 
plant,  to-wit:  $600,000;  C  &  Company,  also  shoe 
manufacturers,  showed  a  net  earning  capacity  of  8% 
on  the  value  of  their  plant,  namely,  $400,000. 

"D,  the  promoter,  succeeded  in  interesting  these 
three  companies  in  the  plan  of  consolidation,  and  upon 
its  consummation,  the  properties  were  all  turned  in  at 


140  PROMOTERS. 

the  valuations  named,  making  a  total  of  $2,000,000, 
with  the  average  earning  capacity  of  8.7%  on  the  val- 
uation named. 

"A  bond  issue  was  created  on  these  properties 
of  $2,000,000,  and  the  capital  stock  of  the  corpora- 
tion taking  over  the  properties  was  placed  at  a  like 
sum,  namely  $2,000,000. 

"One-half  of  this  capital  stock  was  made  pre- 
ferred stock,  6%  cumulative,  and  this  issue  and  the 
bonds  mentioned  were  all  turned  over  to  the  various 
corporations,  pro  rata,  in  full  payment  for  the  plants, 
and  the  parties  originally  owning  the  plants  were 
made  officers  and  directors  of  the  new  corporation. 
This  left  the  promoter  with  $1,000,000  of  the  common 
stock  of  this  combined  aggregation  for  his  profit,  and 
which,  it  is  unnecessary  to  say,  was  promptly  sold  to 
the  unsuspecting  public. " 

Another  example,  and  one  nearer  home,  further 
illustrates  the  resourcefulness  of  human  ingenuity: 
A,  being  a  large  dealer  in  coal,  discovers  a  series  of 
mines  along  and  dependent  upon  a  certain  railroad 
for  shipping  facilities.  He  conceives  the  idea  of  con- 
solidating, or  rather  buying  up  all  of  these  mines  and 
making  them  the  basis  of  a  large  corporation,  which 
would  then  be  in  a  position  to  control  the  output  of 
these  properties.  His  first  step  was  to  get  an  option 
on  all  these  industries  at  a  price  as  near  their  reason- 


PEOMOTEES.  141 

able  value  as  it  was  possible  to  do.  In  addition  to  this, 
he  acquired  options  on  most  of  the  available  land  in 
that  vicinity  that  was  supposed  to  contain  coal,  or 
could  be  utilized  for  the  purposes  he  had  in  view. 

After  he  had  acquired  these  options,  he  went  to  the 
officials  of  the  railroad  company  referred  to,  and  un- 
dertook to  interest  them  in  the  project — making  clear 
the  point  that  the  revenue  from  the  traffic  of  these 
mines  would  in  a  very  short  time  pay  for  the  prop- 
erties— and  incidentally,  that  the  same  traffic  would 
support,  if  not  materially  assist,  in  the  construction 
of  a  competing  railroad  that  would  connect  with 
another  large  system  and  thereby  deprive  them  of  this 
profitable  traffic.  While  the  railroad  company  in 
question  did  not,  itself,  take  an  interest  in  this  proj- 
ect, it  was  by  or  through  the  assistance  of  the  officers 
of  this  road  that  the  deal  was  consummated  and  the 
options  taken  up,  and  working  capital  provided,  with 
money  raised  by  a  bond  issue  upon  the  properties 
themselves.  As  a  result  of  this  transaction,  $1,000,- 
000  in  first  mortgage  bonds  were  floated,  and  $3,000,000 
of  common  stock  was  issued,  largely  for  the  intangible 
assets  of  this  corporation,  namely,  the  options  them- 
selves, which  cost  A  in  the  neighborhood  of  $3,000 
initial  investment. 

Still  another  example  illustrates  the  more  daring 
and  troublesome  class: 


142  PBOMOTEBS. 

A,  B  &  C  organize  a  railroad  corporation  for  the 
ostensible  purpose  of  constructing  a  line  of  road  to 
a  distant  city.  They  have  an  elaborate  prospectus 
prepared,  showing  the  proposed  right  of  way  and 
trains  in  operation.  As  a  temptation  to  the  investors, 
they  show  the  enormous  gross  earnings  of  some  "  com- 
peting line"  and  others  that  are  National  prides,  and 
then  offer  the  stock  of  this  phantom  road  at  a  ridicu- 
lously low  figure  "for  a  limited  time  only;"  and,  as 
a  still  further  generous  concession,  they  propose  to 
permit  small  investors  to  acquire  a  block  of  this  stock 
on  easy  payments. 

Expensive  and  sensational  advertisements  are  in- 
serted in  the  daily  press,  and  every  modern  and 
effective  method  of  reaching  the  wage-earner  is 
adopted;  with  the  result  that  enough  money  is  col- 
lected from  the  inception  to  continue  the  campaign  of 
exploitation  and  promotion. 

Now  the  real  purpose  of  the  scheme  is  put  into 
action,  namely,  the  payment  of  salaries  to  A,  B  &  C, 
and  this  is  continued  until  the  enthusiasm  of  the 
available  investors  is  exhausted. 

There  is  necessarily  a  certain  amount  of  actual 
development  work  done  to  aid  the  scheme  and  to 
bolster  up  a  plausible  defense  in  case  of  interference 
upon  the  ground  of  fraud,  but  the  "Bailroad"  is  ever 
in  contemplation  until  the  contributions  cease,  and 


PROMOTION   CONTRACTS.  143 

then  the  salvage  of  the  financial  wreck  is  passed  along 
into  the  hands  of  a  receiver  for  distribution. 

These  examples  are  given  for  the  purpose  of  illus- 
trating the  possibilities  for  great  financial  gain  which 
have  attracted  the  speculator  and  unscrupulous  alike 
to  this  profession. 


Contrary  to  the  prevailing  notion,  the 

Promotion 

contracts  of  promoters  are  not  neces- 

Contracts. 

sarily  confined  to  the  inception  of  a  busi- 
ness or  the  organization  of  a  corporation.  They  may, 
and  usually  do,  extend  into  the  initial  operation  of  the 
enterprise,  at  least  to  the  extent  of  raising  the  neces- 
sary capital  and  " putting  on  foot"  the  project  in 
hand,  after  the  corporation  is  formed;  and  for  this 
reason,  their  acts  and  responsibilities  may  cover  a 
large  range  of  conduct. 

Probably  the  questions  causing  the  most  contro- 
versy and  litigation  in  this  relation  arise  in  connec- 
tion with  the  promoter's  compensation  or  profit;  that 
is,  how  he  can  lawfully  acquire  compensation  for  his 
services,  when  his  employment  is  to  "set  on  foot  and 
take  the  preliminary  steps, "  in  the  organization  or 
reorganization  of  a  business  project. 

His    compensation   is   often    contingent   upon   the 


144  PROMOTION  CONTRACTS. 

accomplishing  of  a  certain  end,  and  the  difficulty  usually 
encountered  is  to  ascertain  for  whom  he  may  act,  and 
to  whom  he  can  look  for  his  compensation. 

Assuming  that  the  business  with  which  he  is  em- 
ployed is  to  be  conducted  by  a  corporation  to  be 
formed,  manifestly  he  cannot  bind  the  corporation 
until  it  is  in  existence,  and  even  then  there  is  some 
difficulty  encountered  where  the  services  were  ren- 
dered prior  to  the  creation  of  the  corporation  in  ques- 
tion. 

Some  States  have  statutes  providing  for  the  pay- 
ment of  capital  stock  of  corporations  organized  therein 
^-in  services.  They  are  South  Dakota,  North  Dakota, 
Idaho,  Colorado,  West  Virginia,  Delaware,  Maine,  and 
a  number  of  other  States  whose  laws  are  otherwise 
deemed  unfavorable  to  the  principles  announced. 

What  constitutes  "services"  is  often  a  subject  of 
inquiry.  It  has  been  held  that  a  gift  of  stock  to  a 
promoter  is  illegal,  and  that  the  issuance  of  stock  to 
"influential  persons"  for  the  use  of  their  names,  is 
equally  so.  But  the  issuance  of  stock  by  corporations 
created  by  any  of  the  above  named  States  for  bona 
fide  services  actually  performed,  and  for  which  the 
corporation  either  contracts,  or  accepts  the  benefit  of 
by  proper  resolution,  is  legal. 

When  the  promoter  is  acting  for  parties  in  interest 
in  an  established  business,  where  it  is  desired  to  re- 


PBOMOTION  CONTKACTS.  145 

organize  or  enlarge  the  same,  the  safe  and  proper 
method  is  to  contract  with  the  parties  to  be  benefited 
by  such  services,  for  a  percentage  of  the  stock  which 
they  receive  in  payment  for  their  interest  in  the  enter- 
prise. Then,  upon  the  transfer  of  the  business  in 
question  to  the  corporation  when  formed,  the  agreed 
percentage  of  the  stock  issued  to  the  parties  in  interest 
for  their  share  in  the  business  enterprise,  can 
be  assigned  to  the  promoter,  and  in  that  way  obviate 
every  question  and  fulfill  every  requirement. 

The  relation  of  the  promoter  to  the  corporation  is 
usually  fiduciary,  and  in  consequence,  his  acts  and 
duties  in  dealing  therewith  are  governed  by  the  rules 
of  law  pertaining  to  that  relation  generally. 

For  a  general  consideration  of  the  subject  in  hand 
the  rights  and  obligations  of  the  parties  will  be  classi- 
fied as  follows:  The  duties  and  responsibilities  of 
the  promoter  (a)  to  his  client;  (b)  to  the  subscribers 
of  stock;  (c)  to  the  corporation  promoted,  and  (d)  to 
the  stockholders  after  organization;  then,  the  recipro- 
cal duties  and  obligations  of  (e)  the  client  and  (f )  the 
corporation  to  the  promoter. 

The  duties  and  liabilities  of  the  promoter  to  the 
client  are  generally  based  upon  contract,  either  ex- 
press or  implied,  depending  upon  the  circumstances 
of  the  particular  case. 

Generally  speaking,  the  promoter  is  held  to  a  very 


146  PROMOTION  CONTRACTS. 

high  standard  of  conduct,  as  he  usually  occupies  a  re 
lation  of  trust  and  confidence ;  and  whenever  the  ques 
tion  of  his  loyalty  is  involved  the  burden  is  upon  tht 
promoter  to  establish  the  utmost  good  faith  and  fair 
ness  in  all  his  dealings  with  the  client. 

He  may  not  acquire  any  secret  advantage  over  his 
client  by  reason  of  his  employment ;  and  he  is  in  many 
respects  charged  with  the  same  degree  of  responsi- 
bility as  an  attorney. 

The  promoter's  duties  and  liabilities  to  the  sub- 
scriber of  stock  of  the  corporation  frequently  arise 
through  representations  made  by  him  either  in  the 
prospectus  or  otherwise,  before  incorporating.  The 
rule  is  well  established  that  he  is  personally  liable  for 
any  misrepresentations,  and  for  withholding  impor- 
tant information  which  the  circumstances  of  the  par- 
ticular case  make  it  his  duty  to  disclose. 

It  is  not  moral  obligations  that  the  promoter  is 
liable  for;  but  where  it  is  necessary  for  him  to  dis- 
close important  facts  to  enable  the  subscriber  of  stock 
to  determine  whether  or  not  he  will  become  interested 
in  the  proposed  corporation,  failure  to  disclose  will 
render  the  promoter  liable  to  such  subscribers  for  any 
damages  resulting  from  his  silence.  In  other  words, 
intentional  withholding  of  information  may  be  equiv- 
alent to  misrepresentation. 

The  liability  of  a  promoter  to  the  corporation  may, 


PROMOTION   CONTRACTS.  147 

under  appropriate  circumstances,  be  governed  by  the 
same  rules  as  those  applicable  to  his  relation  to  the 
client.  If  the  promoter  places  himself  in  a  position 
of  trust  to  the  corporation,  he  is  charged  "with  all  the 
responsibilities  of  that  relation  generally. 

This  responsibility  invariably  attaches  where  he  is 
looking  to  the  corporation  (when  formed)  for  his 
compensation,  and  where  he  is  to  be  reimbursed  for 
his  expenses  by  it ;  and  it  has  been  said  that  the  test 
of  his  responsibility  is :  Was  he  benefited  by  the  incor- 
poration? In  any  event  he  is  bound  to  exercise  good 
faith,  and  if  he  afterward  acts  for  the  corporation  in 
securing  capital,  either  from  the  sale  of  its  stock  or 
otherwise,  he  thereby  becomes  its  agent  and  will  not 
be  permitted  to  acquire  any  secret  personal  advantage 
through  such  employment. 

The  most  common  source  of  disagreement  and  con- 
sequent litigation  is  where  the  promoter  is  personally 
interested  in  the  property  conveyed  to  the  corporation 
at  the  time  of  its  formation.  In  such  a  case  the  pro- 
moter is  obliged  to  see  that  the  property  conveyed  is 
fairly  valued  as  well  as  fairly  acquired  by  the  corpora- 
tion— that  is,  he  must  see  to  it  that  a  disinterested 
Board  of  Directors  pass  upon  the  value  of  the  prop- 
erty conveyed  by  him,  and  that  it  also  is  to  the  inter- 
est of  the  corporation  to  acquire  such  property. 

This  does  not  mean  that  the  promoter  may  not 


148  PBOMOTION   CONTBACTS. 

make  a  profit  on  property  sold  to  a  corporation  which 
he  is  forming,  but  it  does  mean  that  he  may  not  make 
a  secret  profit  therefrom.  It  is  his  duty  to  disclose  to 
his  corporation  that  he  is  profiting  by  the  transaction, 
or  in  any  event  he  must  not  conduct  himself  so  as  to 
lead  the  directors  to  believe  that  he  is  not  so  doing. 

The  promoter  of  a  corporation  who  becomes  an 
officer  thereof  on  its  formation  is  in  consequence  to  be 
treated  as  its  agent  and  trustee,  and  is  accountable  to 
the  corporation  for  any  secret  profits  which  he  may 
realize  upon  property  bought  for  or  sold  to  the  cor- 
poration. 

In  order  to  charge  one  with  the  responsibilities 
above  referred  to,  it  is  often  a  question  as  to  who  is 
or  is  not  a  promoter.  To  constitute  one  a  promoter 
of  a  corporation  it  must  be  shown  that  he  was  acting 
for  and  on  behalf  of  the  corporation,  or  that  he 
assumed  so  to  act;  and  that  on  the  strength  of  such 
authority  or  assumed  agency,  the  party  complaining 
dealt  with  him  upon  such  understanding. 

The  duties  of  the  promoter  to  the  stockholders  of  a 
corporation  after  it  is  incorporated  are  usually  that 
of  an  agent.  However,  the  promoter  may  be  liable 
to  all,  or  a  part  of  the  stockholders,  for  a  separate 
accounting  to  them,  where  his  course  of  dealing  has 
placed  him  in  the  positon  of  a  partner  at  the  incep- 
tion of  the  undertakings;  that  is,  where  he  has  se- 


PROMOTION  CONTRACTS.  149 

cured  the  co-operation  of  all  or  a  certain  number  of 
the  stockholders  upon  the  representation  that  they 
were  to  share  equally  with  him  in  the  profits  of  the 
undertaking,  in  such  a  case  he  is  liable,  of  course,  as  a 
partner;  and  the  right  of  action  is  based  more  upon 
the  right  of  a  co-partner  than  that  of  a  stockholder. 

Where,  however,  the  wrongs  of  the  promoter  are  in 
the  representations  made  alike  to  all,  in  relation  to 
the  corporation  or  its  property  or  intentions,  the  right 
of  action  must  necessarily  be  maintained  by  the  cor- 
poration, and  not  by  the  stockholders. 

The  reciprocal  duties  and  liabilities  of  the  client  to 
the  promoter  are  usually  regulated  by  contract,  either 
express  or  implied,  and  those  of  the  corporation  to 
the  promoter  depend  largely  upon  the  circumstances. 
If  he  is  acting  directly  for  the  corporation,  its  respon- 
sibilities to  him  are  to  reimburse  him  for  his  services, 
and,  as  before  stated,  if  the  corporation  was  not  in 
existence  at  the  time  the  services  were  performed,  if  it 
afterward  adopts  the  acts  of  the  promoter,  or  accepts 
the  benefits  of  his  work,  it  is  liable  to  him  for  the 
reasonable  value  thereof. 

If  the  statutes  of  the  State  under  which  the  cor- 
poration is  organized  provide  for  a  subsequent  pay- 
ment by  it  of  the  costs  and  expenses  of  incorporating, 
then,  of  course,  he  may  recover  for  such  expenses 
incurred  in  bringing  the  company  into  existence. 


150  PBOMOTION   CONTRACTS. 

Where  a  promoter  acts  for  a  corporation  that  is  to 
be  formed,  his  contracts  are  similar  to  those  of  an 
agent  generally  under  similar  circumstances;  and  if 
the  principal  (the  proposed  corporation)  is  never 
brought  into  existence,  there  is  no  remedy  for  those 
who  have  dealt  with  the  promoter  upon  un-executed 
contracts  made  in  that  way ;  but  it  must  clearly  appear 
that  the  promoter  is  acting  for  a  corporation  to  be 
formed,  or  he  will  be  personally  liable  upon  such  con- 
tracts. 

Of  course,  where  money  or  property  has  been  turned 
over  to  a  trustee,  or  to  the  promoter,  upon  such  con- 
tracts as  are  here  referred  to,  a  different  rule  applies, 
and  the  prospective  stockholder  may  have  appropriate 
relief  in  case  the  corporation  is  never  formed. 

Among  the  important  promotion  contracts  are  those 
relating  to  the  subscription  to  capital  stock,  as  well 
as  bonds  or  other  securities,  made  at  or  before  the 
complete  organization  of  the  corporation,  or  the  tak- 
ing over  of  tangible  property  in  exchange  for  its  stock 
or  bonds,  and  this  subject  is  so  intimately  connected 
with  that  of  underwriting  and  guaranteeing  such  is- 
sues that  they  will  be  considered  here  and  in  the  in- 
verse order  named. 

Underwriting  stock  or  bonds  means  simply  to  sub- 
scribe for  a  certain  portion  or  the  entire  issue,  upon 
the  agreement  that  payments  shall  be  made  at  some 


PROMOTION   CONTRACTS.  151 

future  date  or  on  installments,  and  at  a  price  usually 
below  par.  Such  contracts  are  necessarily  made  with 
banks  and  other  financial  institutions,  syndicates  or 
financiers  of  recognized  ability  and  standing,  who  are 
not  only  able  to  dispose  of  such  securities  but  to  pay 
for  them,  even  if  they  are  not  sold  at  the  time  speci- 
fied in  the  underwriting  agreement  when  such  pay- 
ments are  to  be  made. 

The  advantages  to  the  corporation  from  such  a  con- 
tract are  many,  the  principal  ones  being  the  assurance 
of  ready  working  capital  at  all  events,  the  prestige  of 
a  well-known  distributer  of  securities,  the  services  of 
experienced  financial  agents,  and  a  ready  market. 

The  underwriter  of  such  securities  has  also  special 
facilities  for  ascertaining  the  responsibility  of  the  in- 
stitution issuing  the  securities  offered,  and  the  gen- 
eral investing  public  are  aware  of  that  fact  and  there- 
fore more  readily  influenced  by  the  representations  of 
such  underwriters  concerning  the  merit  and  value  of 
the  investment. 

Many  issues  of  such  securities  are  underwritten  by 
financial  institutions  without  the  investment  of  any 
considerable  portion  of  the  value  of  the  securities  un- 
derwritten, as  they  are  usually  sold  to  the  general  in- 
vestor before  the  payments  by  the  underwriter  become 
due;  and  his  profit  is  usually  the  difference  between  the 


152  PROMOTION  CONTRACTS. 

price  he  contracts  to  pay  for  the  entire  issue  and 
whatever  may  be  realized  from  the  sale  to  the  invest- 
ing public,  and  this  varies  according  to  the  character 
of  the  investment,  and  the  probability  of  their  ready 
sale. 

Guaranteeing  stocks  and  bonds,  as  the  term  implies, 
insures  the  value  and  payment  of  the  issue  or  portion 
thereof  to  the  investor.  Such  an  undertaking  is 
usually  to  guarantee  that  stocks  will  not  pay  less  than 
a  certain  specified  dividend  during  a  certain  period,  or 
that  bonds  will  be  paid  in  full  at  maturity.  Analogous 
to  this  is  what  is  termed  the  " trust- fund"  plan,  which 
is  also  designed  for  the  protection  of  investors,  or  pro- 
fessedly so,  but  it  is  so  little  in  actual  legitimate  use 
as  not  to  merit  discussion. 

The  organizers  of  the  corporation  are  all  considered 
in  law  as  its  promoters  and  their  contracts  as  sub- 
scribers to  the  capital  stock  of  the  corporation  to  be 
formed  for  any  lawful  purpose  are  binding,  as  being 
based  upon  the  consideration  of  their  mutual  agree- 
ments to  take  such  stock  when  the  corporation  is 
formed,  and  each  subscriber  will  be  liable  to  the  other 
subscribers  for  his  failure  to  carry  out  his  subscrip- 
tion. In  addition  to  his  liability  to  the  other  sub- 
scribers, a  further  liability  to  the  corporation  itself, 
as  well  as  to  its  creditors,  accrues  as  soon  as  the  char- 
ter or  certificate  of  complete  organization  is  issued 


OF  THE    .         \\ 

UNIVERSITY  } 

OF  M 

PROMOTION   CONTRACTS.  153 

by  the  State  creating  such  corporation;  in  other  words, 
as  soon  as  the  subscription  is  acted  upon  by  such 
State. 

As  between  the  subscribers  to  the  capital  stock,  a 
special  agreement  to  accept  property,  at  a  fair  valua- 
tion, in  payment  for  such  stock  is  also  legal,  and  the 
valuation  placed  thereon  by  the  subscribers  or  pro- 
moters will  govern;  such  agreement  will  not  bind  the 
corporation  unless  acted  upon  and  adopted  by  it. 

Contracts  for  underwriting  and  guaranteeing  the 
stocks  or  bonds  of  a  corporation  before  it  is  formed, 
are  not  free  from  objection  on  account  of  the  difficulty 
in  the  preparation  of  such  contracts  owing  to  the  lack 
of  a  legal  entity  to  contract  with;  it  is  usual  to  make 
such  contracts  with  a  trustee  or  party  acting  as  such 
for  and  on  behalf  of  the  organizers  of  such  proposed 
corporation  or  the  parties  who  are  to  become  inter- 
ested therein. 

To  summarize,  it  may  be  said  that  promotion  con- 
tracts or  contracts  that  have  to  do  with  promotion  of 
an  enterprise  are  so  numerous  as  to  involve  the  whole 
law  of  contracts,  and  that  any  extended  discussion  of 
that  subject  is  beyond  the  purpose  of  this  volume. 


154  GOOD    WILL  -  TRADEMARKS,    TRADE    NAMES. 


Goodwill.  -  Preceding  chapters  we  have 

Trade-marks  chiefly  referred  to  tangible  property  and 
and  Trade  its  relation  to  the  subjects  of  organiza- 
tion and  reorganization  of  business 
enterprises.  Under  this,  and  the  following  head  we 
will  discuss  intangible  assets,  a  species  of  property  of 
comparative  recent  origin,  and  which  is  largely  the 
product  of  the  business  ability,  devotion  to  principle 
and  ingenuity  of  those  creating  it. 

As  has  been  heretofore  stated,  the  good  will  —  gen- 
eral reputation  for  reliability  and  ability  to  serve  —  is 
frequently  of  greater  value  than  the  tangible  assets 
belonging  to  an  enterprise,  and  the  law  now  recognizes 
it  as  a  very  respectable  species  of  property.  At  the 
same  time  it  is  not  permissible  to  arbitrarily  value  the 
good  will  of  a  business  so  as  to  create  a  fictitious  asset, 
as  is  so  frequently  done. 

The  subject  of  Trademarks  and  Trade  Names  is 
so  intimately  connected  with  that  of  Good  Will  that 
it  is  deemed  necessary,  for  a  practical  understanding 
of  their  importance  and  use,  to  consider  them  together. 
In  fact  they  are  inseparable  when  considered  in  the 
light  and  for  the  purpose  here  intended. 

Trademarks  are  arbitrary  symbols,  devices  or  dis- 
tinguishing marks  applied  to  a  given  article  of  manu- 
facture which  are  destined  to  appeal  to  the  eye  and 


GOOD    WILL — TRADEMARKS,    TRADE    NAMES.  155 

serve  as  a  means  of  ready  and  certain  identification 
from  all  other  products  of  a  similar  nature;  while  the 
use  of  the  Trade  Name  is  to  show  the  source  from 
which  the  particular  article  came.  Therefore  the 
Trade  Name,  appealing  as  it  does  to  the  ear,  is  so 
intimately  connected  with  the  Good  Will  of  the  Manu- 
facture as  to  be  its  means  of  identification. 

The  reputation  and  standing  of  a  business  is  only 
identified  and  protected  by  and  through  its  name  and 
arbitrary  marks  for  identification  of  its  product,  and 
the  possession  of  either  or  both  may  enable  a  stranger 
to  the  particular  enterprise  to  begin  where  another 
leaves  off,  and  thereby  profit  by  his  past  efforts.  And 
here  we  find  proof  positive  of  the  established  ethical 
doctrine,  viz :  that  honesty  and  fair  dealing  are  indis- 
pensible  to  permanent  success  in  business,  for  the  most 
valuable  and  thoroughly  established  Good  Will  may 
perish  when  and  as  soon  as  the  public  discover  any 
deterioration  or  lack  of  the  qualities  which  have 
created  it  in  the  first  instance. 

The  creation  of  the  species  of  property  under  con- 
sideration, viz:  good  will  and  trade  names,  as  well  as 
trademarks,  are  the  result  of  the  labor,  skill  and  in- 
vestments of  the  possessor,  and  their  protection  and 
utilization  as  property  universally  receive  adequate 
protection. 

The  life  of  a  trademark  is  perpetual,  and  while  the 


156  GOOD    WILL TRADEMARKS,    TRADE    NAMES. 

law  protects  it  for  the  benefit  of  the  public,  the  pro- 
tection of  the  trade  name  is  principally  for  the  party 
entitled  to  it. 

The  property  right  in  trademarks  is  recognized  by 
common  law,  and  has  been  by  the  courts  since  the 
latter  part  of  the  fifteenth  century.  Most  of  the  States 
have  laws  for  the  protection  of  trademarks,  and  the 
National  Government  has  a  complete  system  for  their 
registration. 

It  is  essential  to  the  property  right  in  a  trademark 
that  the  party  claiming  it  as  his  own  should  be  the 
first  to  adopt  it  as  such,  and  then  to  so  use  the  mark 
as  to  show  the  intent  to  create  a  property  right 
therein;  and  this  may  be  done  only  by  actual  adop- 
tion and  constant  use  by  the  originator  or  his  succes- 
sors or  assigns. 

The  reason  that  the  law  of  trademarks  is  designed 
chiefly  for  the  protection  of  the  public  is  to  prevent 
the  substitution  of  an  inferior  for  a  superior  article, 
or  of  one  man's  goods  for  another's. 

For  what  may  be,  as  well  as  for  what  may  not  be 
an  appropriate  trademark,  is  beyond  the  scope  of  this 
book,  it  being  a  subject  of  too  great  moment  and  im- 
portance to  be  treated  in  a  general  discussion  of  the 
subject  as  this  is  designed  to  be.  Like  the  general  law, 
it  must  necessarily  receive  the  attention  of  one  versed 
in  the  particular  branch  of  the  science,  whenever  the 


157 

questions  relating  to  the  adoption  and  establishment, 
as  well  as  the  registration,  of  a  trademark  is  involved. 

Generally  speaking,  however,  geographical  names 
cannot  be  appropriated  as  such  trademarks,  and  un- 
less protected  through  the  laws  of  unfair  competition, 
there  is  no  protection  in  the  use  of  such  geographical 
names.  Neither  can  the  name  of  a  given  commodity 
be  used  as  a  trademark,  and  this  applies  as  well  to 
the  name  of  an  article  that  is  patented;  for  after  the 
life  of  a  patent  has  expired  by  limitation,  the  public 
has  a  right  to  use  the  name  by  which  such  patented 
article  has  been  identified,  as  well  as  to  its  unre- 
stricted manufacture.  The  name  of  the  producer  or 
words  necessarily  descriptive  of  the  article  cannot  be 
used  as  trademarks. 

To  constitute  a  valid  trademark  and  what  may  be 
adopted  for  such  a  purpose,  the  name  or  symbol  must 
be  exclusive — that  is,  it  must  be  first  adopted  and  used 
by  the  party  claiming  it  for  marking  a  certain  article, 
grade  or  quality  of  his  product;  and  he  may  not  in- 
fringe on  the  marks  of  others  so  as  to  create  confu- 
sion and  deception.  Generally  speaking,  any  symbol, 
word  or  mark  which  others  have  not  an  equal  right 
to  use  may  be  adopted  as  a  trademark. 

Kegistration  of  trademarks  is  not  a  means  of  cre- 
ating them,  but  it  serves  to  establish  title,  by  proof  of 
adoption. 


158  GOOD    WILL TKADEMAKKS,    TKADE    NAMES. 

The  value  of  trademarks  to  a  business  is  now  almost 
universally  understood  and  acknowledged;  their  use 
tends  to  fix  in  the  minds  of  all  who  observe  them 
the  object  advertised,  regardless  of  the  wording  of  the 
advertisement  or  whether  it  is  ever  read  or  not ;  hence 
the  advertisement  is  not  a  loss  in  any  event. 

The  Good  Will  and  Trade  Name  are  a  species  of 
property  that  may  be  valued  and  sold,  and  the  pur- 
chaser protected  in  their  enjoyment  the  same  as  any 
other  property;  the  same  is  true  with  trademarks. 

The  assignment  of  trademarks  may  be  made  to  the 
same  extent  as  other  property,  but  with  one  impor- 
tant exception — the  trademark  must  (with  few  excep- 
tions) accompany  and  pass  to  the  party  who  purchases 
the  good  will  of  the  business;  any  general  assignment 
of  the  good  will,  will  carry  with  it  the  trademarks  in 
use,  without  any  special  reference  to  such  trademarks 
in  the  assignment,  and  this  is  equally  true  of  the  trade 
name  in  use. 

While  it  is,  of  course,  impossible  to  fix  the  value  of 
the  good  will  of  a  business  with  mathematical  precis- 
ion and  accuracy,  still  such  value  may  be  arrived  at 
with  sufficient  certainty  for  all  practical  purposes. 
The  common  rule  adopted  for  valuing  the  good  will  is, 
to  first  ascertain  the  net  earning  capacity  of  the  busi- 
ness for  a  given  period,  usually  for  a  sufficient  number 
of  years  to  reach  the  general  average  of  such  earning 


GOOD    WILL — TRADEMARKS,    TRADE    NAMES.  159 

capacity,  then  to  divide  the  amount  thus  obtained  by 
the  number  of  years  over  which  the  estimate  extends, 
and  this  will  constitute  the  general  average  profits  upon 
which  the  value  of  the  good  will  depends.  Then  as 
to  the  value,  it  must  necessarily  vary  according  to  the 
circumstances  of  the  particular  case. 

A  common  practice  in  determining  and  fixing  the 
value  of  the  good  will  (where  common  stock  is  to 
be  issued  therefor)  has  heretofore  been  to  place  the 
amount  at  a  sum  upon  which  the  annual  net  earnings 
would  pay  a  dividend,  equal,  at  least,  to  the  legal 
rate  of  interest  prevailing  in  the  State  where  the  trans- 
action occurs.  As  an  example,  suppose  the  average 
annual  net  earnings  to  be  fifty  thousand  dollars 
($50,000);  this  would  be  five  percent  (5%)  on  one 
million  dollars  ($1,000,000)  and  that  sum  would  con- 
stitute the  value  of  the  good  will.  But  this  is  purely 
arbitrary  and  without  foundation  in  reason,  as  the 
good  will  differs  so  widely  in  character  from  actual 
money  or  money's  worth  that  to  make  it  a  basis  of 
value  upon  its  earning  power  is  to  go  farther  and  place 
its  intrinsic  worth  equal  to  money  as  well.  Besides, 
the  good  will  of  a  business  has  no  value  aside  from  its 
immediate  connection  with  the  business  itself,  and 
upon  the  winding  up  of  the  enterprise,  by  law  or  upon 
liquidation,  the  property  vanishes. 


160  PATENTS   AND    THEIR   COMMERCIAL   VALUE. 

As  before  intimated,  no  inflexible  rule  will  apply  in 
fixing  the  value  of  the  good  will  of  a  business;  its  age, 
standing  and  earning  capacity  are  elements  of  its  value 
only. 

The  trademarks  are  integral  parts  of  the  business 
as  a  unit,  and  their  individual  value  is  not  important, 
except  as  elements  in  the  valuation  of  the  good  will 
and  their  relative  value  and  importance  to  the  future 
of  the  enterprise. 

Here,  as  with  patents,  it  is  difficult  to  value  "future 
prospects  and  possibilities"  and  this  must  depend  upon 
the  particular  circumstances  of  the  case  under  consid- 
eration; for  if  the  business  has  been  organized  and 
established  with  skill  and  experience  behind  it,  its  fu- 
ture prospects  and  possibilities  may  be  of  far  greater 
value  than  its  present  good  will,  and  in  this,  at  least, 
intangible  property  differs  from  that  of  tangible,  viz: 
in  that  of  their  valuation. 


patents        It  is  to  inventive  genius  that  we  owe 

and  Their     much  of  the  wonderful  material  prog- 

commerciai     ress  Of  the  world  during  the  last  few 

hundred    years.      Starting    from    the 

printing  press,  which  has  brought  universal  education 

and  enlightenment,  making  civil  and  religious  liberty 


PATENTS   AND    THEIR    COMMERCIAL   VALUE.  161 

possible,  a  succession  of  astonishing  inventions  has 
carried  civilization  forward  by  leaps  and  bounds  to 
this,  the  "Machine  Age."  The  weaving  inventions 
have  clothed  the  humblest  laborer  in  fabrics  that  once 
delighted  kings.  Steam  and  electricity  have  made  all 
nations  neighbors,  and  the  minor  special  inventions 
and  discoveries  have  filled  the  houses  of  the  "common 
people"  with  luxuries  which  but  a  few  generations  ago 
were  beyond  the  dreams  of  princes. 

Eecognizing  the  value  to  society  of  the  wonderful 
fruits  of  invention  and  investigation,  governments 
have  sought  to  stimulate  the  efforts  of  inventors  by 
the  enactment  of  laws  that  enable  them  to  reap  a  suita- 
ble reward  for  their  services  to  humanity. 

Although  many  an  inventor  has  slept  on  his  rights, 
and  never  realized  enough  to  cover  the  expense  of 
suing  out  a  patent  on  his  invention,  yet  many  of  the 
great  fortunes  amassed  in  this  country  have  had 
patents  for  their  basis.  We  readily  recall  the  Pull- 
man palace  car;  the  telephone  and  numberless  other 
electric  inventions;  the  Westinghouse  air  brake;  the 
mowing  and  reaping  machines;  the  bicycle  and  auto- 
mobile devices,  and  a  thousand  more.  Many  a  great 
manufacturing  business  has  been  built  up  on  some 
simple  invention  or  improvement  which  cheapened  the 
productions  of  some  article  of  common  use.  In  fact, 
the  most  fruitful  field  for  the  rank  and  file  of  the 


162  PATENTS   AND    THEIB   COMMERCIAL   VALUE. 

army  of  inventors  has  been  among  the  simpler,  almost 
trifling,  inventions,  and  improvements  on  other  in- 
ventions. 

The  inventors  of  a  shoe-button,  a  safety-pin,  a  hook- 
and-eye,  the  i '  roaming  toy, ' '  a  dime  savings  bank,  etc., 
made  quick  and  easy  fortunes. 

Notwithstanding  the  great  number  of  patents 
issued,  it  seems  as  if  the  field  for  new  ones  grows 
wider  the  more  the  patents  increase.  Each  new  de- 
velopment seems  to  create  new  wants  and  the  need  of 
new  devices.  Inventions  known  as  "novelties,"  and 
improvements  on  articles  in  every  day  use  are  con- 
stantly in  demand. 

Contrary  to  the  prevailing  notion  among  many  lay- 
men, the  fact  that  an  article  has  been  "patented"  is 
no  conclusive  assurance  that  an  exclusive  right  "to 
manufacture  and  use"  such  an  article  is  thereby 
secured  to  the  owner.  While  it  is  true  that  the  issu- 
ing of  letters  patent  on  an  invention  is  prima  facie 
evidence  of  its  patentability,  still  it  is  not  conclusive 
evidence. 

In  investigating  the  questions  in  hand,  the  statutory 
requisites  to  patentability  first  require  consideration. 
In  order  that  they  may  be  understood,  the  law  on  the 
subject  will  be  here  given,  namely : 

"Any  person  who  has  invented  or  discovered  any 
new  and  useful  art,  machine,  manufacture,  or  compo- 


PATENTS   AND    THEIE   COMMERCIAL   VALUE.  163 

sition  of  matter,  or  any  new  and  useful  improvements 
thereof,  not  known  or  used  by  others  in  this  country 
before  his  invention  or  discovery  thereof,  and  not 
patented  or  described  in  any  printed  publication  in 
this  or  any  foreign  country  before  his  invention  or 
discovery  thereof,  for  more  than  two  years  prior  to 
his  application,  and  not  in  public  use  or  on  sale  in  this 
country  for  more  than  two  years  prior  to  his  appli- 
cation, unless  the  same  is  proved  to  have  been  aban- 
doned may,  upon  payment  of  the  fees  required  by 
law,  and  other  due  proceedings  had,  obtain  a  patent 
therefor. ' ' 

It  is  apparent  that  utility  is  one  of  the  chief  consid- 
erations upon  which  the  Government  grants  its  ex- 
clusive right  to  use  and  produce  an  invention ;  and  this 
important  requisite  to  patentability  largely  determines 
its  commercial  worth  as  well.  As  already  appears, 
the  invention  must  be  "new  and  useful/'  as  well  as 
useful,  but  manifestly  the  fact  that  the  invention  is 
new  would  not  render  it  of  any  value  in  the  business 
world  unless  it  was  useful  as  well;  therefore,  in  ar- 
riving at  the  commercial  value  of  a  patented  invention 
utility  is  the  first  feature  to  consider. 

The  essential  features  that  determine  the  commer- 
cial value  of  a  patented  invention,  and  the  order  in 
which  they  may  be  investigated,  are :  First,  the  utility, 
i.  e.,  the  usefulness — intrinsic  novelty  and  the  probable 


164  PATENTS   AND    THEIB   COMMERCIAL   VALUE. 

demand ;  second,  the  cost  of  production,  i.  e.,  the  man- 
ufacturing possibilities  and  means  of  producing  the 
invention;  third,  the  legal  novelty — patentability,  i.  e., 
the  construction  and  validity  of  the  specifications  and 
claims,  as  well  as  the  protection  afforded  thereby ;  and, 
fourth,  the  title  of  the  patentee  or  alleged  owner  of  the 
invention. 

As  to  the  utility  and  manufacturing  merits  and  cost 
of  an  article,  these  are  questions  for  the  experienced 
business  man  and  skilled  mechanic,  and  they  are  of 
first  importance  in  determining  the  commercial  value 
of  an  invention. 

Perhaps  the  simplest  method  of  determining  the 
legal  novelty,  i.  e.,  patentability  of  an  invention,  and 
the  one  primarily  useful,  is  to  see  if  it  contains  either 
or  both  of  the  following  elements :  First,  if  the  article 
produced  is  as  good  in  quality,  and  (as  a  result  of  the 
invention)  such  article  can  be  produced  at  a  cheaper 
rate  than  similar  articles  already  on  the  market;  or, 
if  it  is  better  in  quality  and  can  be  produced  at  the 
same  rate  as  other  articles,  or  both  combined;  and 
as  to  the  device  or  method  of  production,  if  the  object 
in  view  or  manner  of  obtaining  the  same  be  new,  and 
the  device  or  product  be  useful,  then  it  may  be  consid- 
ered a  patent  able  invention  and  subject  to  such  pro- 
tection. 

The  law  protects  simplicity  and  economy  of  con- 


PATENTS    AND    THEIR   COMMERCIAL   VALUE.  165 

struction,  and  the  fact  that  the  invention  does  not 
appear  to  be  a  great  one  will  not  prevent  its  being  con- 
sidered as  a  new  and  useful  invention.  The  substitu- 
tion of  different  kinds  of  power  for  the  accomplish- 
ment of  a  common  end  is  not  a  subject  of  patent;  the 
mere  assemblying  of  a  number  of  old  devices  or  forms 
for  the  accomplishment  of  a  well-known  result  is  not 
patentable;  the  omission  of  an  element  from  a  device 
so  that  the  same  result  may  be  obtained  by  a  less  num- 
ber of  operations  or  devices  is  patentable;  the  com- 
bination of  known  elements  for  the  production  of  a 
new  result  is  patentable;  the  accomplishing  of  a 
greater  result  or  utility  from  the  same  quality  of  ma- 
terial may  be  patentable,  etc. 

The  fact  that  a  resourceful  patent  attorney  may 
have  obtained  letters  patent  on  a  device  that  did 
not  in  reality  contain  patentable  requisites  may  be 
disclosed  for  the  first  time  upon  the  trial  of  a  suit  for 
infringement.  An  illustration  of  this  fact  is  found  in 
a  recent  case  decided  by  the  Supreme  Court  of  the 
United  States,  involving  the  validity  of  patents  issued 
upon  *  '  sectional  bookcases, ' '  where  two  rival  manufact- 
urers sought  to  establish  their  respective  rights  to  the 
exclusive  use  of  these  now  popular  office  and  house- 
hold articles,  with  the  result  that  the  Supreme  Court 
held  the  patents  to  be  void  for  lack  of  patentability. 

Another  practical  subject  for  consideration  relates 


166  PATENTS   AND    THEIR   COMMERCIAL   VALUE. 

to  questions  of  conveyance.  The  titles  to  patented 
inventions  may  be  investigated  in  a  similar  manner 
to  those  of  real  estate,  for  the  reason  that  the  Govern- 
ment has  a  complete  recording  system,  wherein  all 
conveyances,  licenses,  etc.,  are  (or  should  be)  re- 
corded ;  and  an  abstract  of  title  may  be  had,  by  appli 
cation  to  the  Commissioner  of  Patents,  and  the  pay- 
ment of  the  necessary  charges  therefor,  which  depends 
entirely  upon  the  number  of  transfers  that  have  been 
recorded,  and  such  an  abstract  of  title  is  necessary  to 
determine  and  show  the  title  to  any  patented  inven- 
tion. 

The  subject  of  transfer  of  letters  patent  may  be  di- 
vided into  three  classes :  First,  the  assignment  of  the 
whole  or  an  undivided  interest  in  an  invention  before 
letters  patent  have  been  issued;*  second,  an  assign- 
ment of  the  whole,  or  an  undivided  interest,  in  an 
invention  after  letters  patent  have  been  issued,!  and 
third,  a  license  or  other  conveyance,  not  amounting  to 
an  absolute  sale  of  the  whole  or  any  part  of  the  inven- 
tion itself. 

An  invention  is  susceptible  of  being  conveyed  prior 
to  the  issuing  of  letters  patent  thereon ;  and  as  between 
the  parties  to  such  a  contract  the  same  is  binding, 
whether  the  patent  ever  issued  or  not ;  and  should  the 
patent  issue,  such  contract  has  the  same  force  and 

*  See  form  In  Appendix,  page  227      t  See  form  in  Appendix,  pages  229-231. 


PATENTS   AND    THEIR   COMMERCIAL   VALUE.  167 

effect  as  an  assignment  after  issue.  In  fact,  it  is  not 
unusual  for  such  assignment  to  contain  authority  and 
instruction  to  the  Commissioner  of  Patents  to  issue 
the  patent  to  the  assignee. 

As  to  the  conveyance  of  a  patented  invention  after 
letters  patent  have  issued,  this  is  comparatively  a 
simple  matter,  requiring  only  that  the  person  who  is 
the  owner  of  such  patented  inventions  shall  execute  a 
formal  conveyance  of  the  same.  The  only  important 
observation  that  need  be  made  on  the  subject  of  actual 
conveyance  is  as  to  the  propriety  of  an  inventor  or 
owner  of  letters  patent  conveying  an  undivided  inter- 
est (i.  e.,  a  one-half  or  one-third  interest)  in  the 
same;  for  such  an  act  may  destroy  the  value  of  the 
monopoly  on  the  invention.  It  has  been  demonstrated 
and  decided  that  the  owner  of  an  undivided  interest 
in  an  invention  has  all  the  rights  of  the  exclusive 
owner  so  far  as  to  manufacture,  vend  and  sell  the  de- 
vice in  question;  and  besides,  it  is  essential  that  in 
prosecuting  or  defending  an  infringement  suit  the 
owners  of  the  entire  interest  must  join  in  order  to 
maintain  or  defend  such  a  suit;  and  this  may  be  im- 
possible after  the  conveyance  of  a  part  has  been 
made. 

In  relation  to  contracts  which  purport  to  be  licenses 
or  "shop  rights"  for  the  exclusive  or  territorial  right 
to  manufacture  or  sell  a  patented  invention,  the  word- 


168  PATENTS   AND    THEIE   COMMERCIAL   VALUE. 

ing  of  such  contracts  may  amount  to  a  transfer  of  the 
entire  interest  of  the  inventor,  instead  of  a  license  or 
contract,  unless  care  is  exercised  in  the  preparation  of 
such  an  instrument.  In  general,  any  wording  that 
amounts  to  the  sole  and  exclusive  right  and  monopoly 
of  manufacturing  or  selling  the  device  is  a  transfer  of 
the  entire  interest  therein. 

A  simple  test  of  the  question  as  to  whether  a  license 
in  reality  amounts  to  a  conveyance  is  if  the  grant 
vests  the  entire  interest  in  the  invention  or  transfers 
the  monopoly  therein,  it  is  an  assignment ;  on  the  other 
hand,  if  it  leaves  in  the  assignor  any  part  of  the  exclu- 
sive monopoly  granted  under  the  patent,  then  the  con- 
veyance is  a  license.  It  is  always  a  question  of  con- 
struction of  the  language  used,  and  it  is  necessary  that 
great  care  should  be  exercised  in  the  wording  of  the 
instrument  intended  as  a  license. 

The  soliciting  of  patents  is  essentially  a  specialty 
in  the  practice  of  Patent  Law,  and  the  commercial 
value  of  a  patent  depends  (in  a  marked  degree)  upon 
the  care,  skill  and  ablity  of  its  solicitor. 

Much  criticism  has  been  made  upon  our  patent  laws 
on  account  of  the  opportunity  which  is  accorded 
thereby  to  deprive  the  public  of  the  benefit  of  new  and 
useful  inventions  during  the  lifetime  of  the  patent. 
An  investigation  of  the  patent  records  at  Washington 
discloses  the  fact  that  many  important  improvements 


PATENTS   AND    THEIR   COMMERCIAL   VALUE.  169 

on  existing  devices  now  in  common  use  have  been 
made,  and  that  they  have  been  purchased  by  leading 
manufacturers  in  the  line  of  business  to  which  the 
invention  pertains;  that  instead  of  " bringing  out" 
such  inventions,  and  giving  the  public  the  benefit  of 
their  improvements,  they  are  "shelved"  so  to  speak. 

The  explanation  for  this  evidently  lies  in  the  fact 
that  one  of  the  most  expensive  departments  of  every 
manufacturer  is  the  "experimental  department "  and 
the  great  expense  attached  to  the  making  of  constant 
changes  in  a  given  product,  besides  the  "confusion" 
which  would  be  produced  thereby.  At  the  same  time 
these  "business  reasons"  do  not  satisfy  or  interest  the 
public,  who  have  granted  the  patent  protection  to  the 
inventor  as  a  reward  bestowed  for  his  invention  and 
a  stimulus  to  future  efforts. 

One  of  the  manifold  benefits  to  be  derived  by  adopt- 
ing the  corporate  system  inures  to  the  inventor  when, 
as  is  frequently  the  case,  he  is  without  sufficient  means 
to  develop  and  market  his  invention.  As  has  been 
hereinbefore  intimated,  he  may  not  assign  an  un- 
divided interest  in  his  invention  without  risking  the 
monopoly  or  exclusive  right  to  manufacture,  vend  and 
sell  the  same,  and  this  may  occur  as  well  by  a  co- 
partnership arrangement  for  its  control  as  by  separate 
assignment;  hence  the  almost  universal  adoption  of 


170  PATENTS   AND    THEIR   COMMEKCIAL   VALUE. 

the  corporate  plan  under  all  such  and  similar  circum- 
stances. 

An  inventor  may  form  a  corporation  under  the  laws 
of  any  State,  and  assign  his  invention  to  such  cor- 
poration without  endangering  the  rights  secured  to 
him  under  the  letters  patent  from  the  Federal  Govern- 
ment. As  in  every  other  case,  it  behooves  him  to  pro- 
tect his  rights  in  the  corporation  by  retaining  control 
or  a  sufficient  interest  in  the  same  to  insure  protec- 
tion. The  corporation  becomes  the  sole  owner  of  the 
invention  by  such  an  assignment  as  above  suggested, 
and  through  its  elasticity  for  adaption  to  particular 
needs,  any  legal  purpose  may  be  accomplished,  either 
through  the  making  of  a  contract  with  the  inventor 
or  the  issuance  of  its  capital  stock  for  the  reasonable 
fair  commercial  value  of  the  invention.  And  while 
the  courts  have  held  that  there  is  no  presumption  of 
value  to  a  patented  invention,  yet  it  may  be  safely 
said  that  such  a  value  may  be  placed  upon  the  inven- 
tion as  its  particular  merits  and  the  extent  of  the  pro- 
tection afforded  by  the  patent  grant  will  warrant,  and 
this  may  be  determined  by  the  rules  referred  to  herein, 
and  others  which  will  present  themselves  in  every  case, 
and  the  reasonable  value  of  such  invention  to  the  cor- 
poration, if  fairly  arrived  at,  will  govern. 

It  has  been  the  almost  universal  experience  of  those 
attempting  to  deal  with  inventors  (as  a  class)  that 


MINING  ENTEEPEISES.  171 

they  greatly  exaggerate  tlie  real  commercial  value  of 
their  inventions;  and  this  undoubtedly  is  due  to  the 
application  and  devotion  which  has  been  bestowed  to 
create  the  invention  in  the  first  instance,  or  the  lack 
of  experience  in  marketing  or  the  development  of  new 
improvements  in  existing  devices. 


Mining  The  vast  amount  of  capital  neces- 
Enterprises.  sarily  involved  in  acquiring,  equipping, 
developing  and  conducting  mining  enterprises  makes 
this  one  of  the  most  favorable  objects  for  corporate 
organization ;  and  while  many  of  the  principles  hereto- 
fore announced  as  relating  to  this  form  of  existence 
generally  apply  with  equal  force  to  mining  enterprises, 
still  there  are  important  questions  which  should  be 
considered  separately,  as  peculiarly  applicable  to  such 
undertakings. 

That  there  is  such  a  legal  and  practical  distinction 
between  mining  corporations  and  those  organized  for 
commercial  and  other  undertakings  has  been  recog- 
nized by  courts  of  review.  In  considering  the  nature 
of  mining  as  distinguished  from  commercial  corpora- 
tions, or  corporations  created  for  the  conduct  of  com- 
mercial enterprises  generally  one  court  said: 

11  Mining  corporations  are  &ui  generis.     They  are 


172  MINING  ENTERPRISES. 

organized  and  carried  on  upon  principles  wholly  dif- 
ferent from  banking,  railroad,  insurance  and  ordinary 
commercial  corporations  having  a  subscribed  capital 
stock. " 

And  to  some  degree,  at  least,  the  rules  relating  to 
organizing  the  different  kinds  of  mining  corporations 
differ,  particularly  in  the  mode  of  financing.  The 
plans  that  would  be  applicable  to  a  corporation  formed 
for  the  mining  of  precious  metals  would  not  ordinarily 
be  appropriate  for  a  corporation  created  for  the  oper- 
ation of  coal  properties,  or  the  development  of  a  marble 
or  stone  industry. 

The  reason  for  this  lies  largely  in  the  character  of 
the  undertaking.  In  the  case  first  named  its  specula- 
tive character  is  to  be  taken  into  consideration,  and 
the  plans  of  financing  applicable  to  mining  enterprises 
of  a  speculative  character  differ  widely  from  those 
commonly  adopted  for  the  promotion  of  those  which 
are  less  so. 

Specialization  in  the  professions  and  business  alike 
is  now  universal,  and  this  fact  is  emphasized  in  the 
subject  under  consideration.  An  operator  in  the 
copper,  lead  or  zinc  field  would  not,  as  a  rule,  be 
equipped  to  operate  a  coal  mine,  and  vice  versa.  And 
a  miner  of  the  precious  metals  could  not  adopt  the 
same  methods  used  by  him,  and  which  are  acquired  by 


MINING  ENTEKPEISES.  173 

experience  and  training  in  that  special  department  of 
mining,  to  either  of  the  other  classes  named. 

The  geologist  and  mining  engineer  also  specialize, 
as  do  the  manufacturers  and  dealers  in  mining  equip- 
ment and  supplies ;  and  the  advantages  of  specializing 
in  this  field,  as  in  all  others,  are  now  well  recognized 
by  all  familiar  with  the  subject.  The  owner  of  a  valu- 
able mining  property  which  had  met  with  disaster 
would  now  no  more  employ  a  mining  engineer  who 
was  not  a  specialist  in  that  particular  class  of  min- 
ing than  the  same  individual  would  call  a  general 
medical  practitioner  to  perform  a  major  surgical 
operation  upon  himself. 

In  the  discussion  of  the  subject  in  hand  no  attempt 
will  be  made  to  detail  the  history  of  that  class  of  min- 
ing corporations  which  have  been  organized  for  ques- 
tionable or  fraudulent  purposes — such  as  the  acquir- 
ing of  capital  to  pay  salaries,  and  to  provide  a  means 
for  their  promoters  to  get  hold  of  stock  certificates  in 
order  that  they  might  get  money  from  the  inex- 
perienced investors,  the  chief  concern  of  those  organiz- 
ing such  companies  being  to  successfully  avoid 
criminal  prosecution  for  their  transactions.  At  the 
same  time  no  extended  discussion  will  be  attempted 
of  the  innumerable  plans  and  devices  whieh  have  been 
heretofore  adopted  to  finance  and  promote  speculative 
mining  enterprises,  particularly  those  devoted  exclu- 


174  MINING  ENTERPRISES. 

sively  to  the  mining  of  precious  metals.  It  will  be 
sufficient  for  the  purposes  of  this  volume  to  state  that 
the  manner  of  organization  of  such  a  corporation 
must  be  governed  by  the  circumstances,  and  the  laws 
of  the  State  where  the  particular  corporation  is 
created,  and  to  refer  to  some  of  the  practical  and 
distinguishing  features  generally. 

The  important  questions  of  procedure  which  arise 
for  consideration  in  the  organization  of  and  which  are 
peculiar  in  a  mining  corporation  are  first  the  cap- 
italization (and  this  involves  the  necessities  of  the  in- 
corporators  and  questions  of  finance) ;  the  next  is 
undoubtedly  the  purpose  of  the  corporation  which  is 
to  conduct  such  an  enterprise;  and  the  third  is  the 
domicile,  or  the  selection  of  a  State  for  its  creation. 

It  is  customary  (and  undoubtedly  the  custom  will 
continue)  to  capitalize  corporations  that  are  organized 
to  mine  precious  metals  at  an  arbitrary  amount,  with- 
out regard  to  the  value  of  the  property  which  it  is  to 
own  and  operate;  then  to  convey  the  mining  claims 
to  the  corporation  for  all,  or  a  large  proportion  of  the 
capital  stock,  and  to  then  donate  back  into  the  treas- 
ury all,  or  so  much  of  the  capital  stock  as  is  to  be 
sold  for  development  purposes;  and  this  might  be  con- 
sidered the  established  custom,  and  one  which  is  free 
from  legal  objections.  Particularly  is  this  true  when 
such  mining  corporations  are  created  under  the  laws 


MINING  ENTERPRISES.  175 

of  a  State  where  the  mining  of  precious  metals  is  the 
principal  industry,  for  in  all  such  States  special  laws 
have  been  enacted  to  encourage  the  development  of  the 
State's  mining  resources,  and  the  speculative  nature 
of  the  undertaking  is  there  recognized  and  the  value 
placed  upon  the  mining  claims  or  other  properties  by 
directors  of  domestic  corporations  are  conclusive. 

In  regard  to  the  less  speculative  mining  enterprises, 
such  as  coal,  copper,  lead,  zinc  and  stone,  their  cap- 
italization should  receive  more  conservative  treatment, 
and  they  may  be  considered  as  more  nearly  approach- 
ing the  commercial  corporation  in  regard  to  their 
formation.  An  example  of  "high  finance "  in  the  con- 
solidation of  coal  properties  has  been  already  shown, 
and  the  general  principles  therein  exemplified  will 
illustrate  the  possibilities  of  creating  questionable 
securities  by  grossly-inflated  valuation  of  the  proper- 
ties consolidated.  It  may  be  conceded  that  the  latitude 
permissible  in  the  valuation  of  properties  of  this 
character  is  greater  than  in  the  ordinary  industrial 
undertaking,  and  that  the  "good-faith"  rule,  herein- 
before referred  to,  is  all  that  is  required;  that  is,  the 
exercise  of  good  faith  and  the  absence  of  fraud  in  the 
valuation  of  such  mining  properties  will  constitute  a 
safe  rule,  both  as  to  liability  of  directors  or  upon  the 
capital  stock  issued  in  payment  for  such  properties. 

It  is  of  practical  importance  that  the  capitalization 


176  MINING  ENTERPRISES. 

of  a  mining  corporation  should  be  fixed  with  due 
regard  for  its  ultimate  object.  If  no  further  prop- 
erties are  to  be  acquired  than  the  one  in  contemplation 
at  the  time  of  organization,  the  amount  of  capitali- 
zation should  be  governed  by  the  value  of  the  mineral 
rights  or  land,  and  the  necessary  working  capital ;  and 
with  a  proper  foundation  the  capital  stock  of  such  a 
corporation  can  be  increased  to  meet  any  future  expan- 
sion that  may  be  deemed  advantageous.  But  where  a 
corporation  is  to  be  formed  to  acquire  two  or  more 
developed  mines,  or  with  that  ultimate  object  in  view, 
the  question  is  more  difficult  of  solution,  and  no  gen- 
eral rule  can  be  announced  that  would  meet  the  re- 
quirements of  any  but  particular  cases,  or  be  of  prac- 
tical value  in  so  doing ;  and  it  might  be  added  that  this 
is  one  of  the  numerous  conditions  which  confronts  the 
organizers  of  large  corporations  generally,  and  noth- 
ing but  an  intimate  knowledge  of  the  subject,  and 
actual  experience  in  its  application,  can  qualify  such 
organizers  to  properly  meet  and  dispose  of  many  of  the 
important  practical  questions  which  invariably  arise. 
The  creation  of  bonds  which  are  secured  by  the  prop- 
erty of  the  mining  corporation,  is  frequently  desirable, 
for  the  purpose  of  raising  working  capital  as  well  as 
for  the  protection  of  those  interested  in  the  enterprise ; 
and  the  use  of  such  bonds  have  frequently  been  the 
means  by  which  a  worthy  and  enterprising  operator 


MINING  ENTERPRISES.  177 

has  ultimately  acquired  the  ownership  of  valuable 
mining  property. 

The  sale  of  such  bonds  among  financial  institutions 
is  often  difficult,  for  the  reason  that  the  property  upon 
which  they  are  secured  usually  lies  at  a  distance,  and 
the  value  of  such  property  is  based  largely  upon  its 
continued  operation  and  development ;  and  unless  this 
is  assured,  such  bonds  are  not  considered  as  desirable 
security,  and  experience  has  often  demonstrated  that 
when  such  bonds  are  sold  in  the  open  market  at  all, 
it  has  been  at  a  great  sacrifice.  However,  with  proper 
management  and  with  the  property  in  a  developed 
stage,  the  issuance  of  such  bonds  is  not  only  advan- 
tageous but  their  sale  to  private  investors  or  local 
financiers  may  be  effected  much  more  readily  than 
stock,  and  without  unreasonable  sacrifice. 

The  purposes  or  objects  of  mining  corporations  are 
of  importance  for  all  the  reasons  heretofore  given 
under  another  and  appropriate  heading,  as  well  as  for 
the  following,  which  are  in  a  measure  peculiar  to  min- 
ing corporations :  As  before  stated,  it  is  a  well-settled 
principle  of  law  in  every  jurisdiction  that  a  corpora- 
tion cannot  exceed  the  powers  conferred  upon  it  by 
its  charter,  and  such  powers  are  derived  by  and 
through  the  wording  of  the  purposes  or  objects  set 
forth  in  the  application  for  such  charter. 

Where  it  is  the  intention  of  the  incorporators  to  do 


178  MIKING  ENTERPRISES. 

more  than  actually  operate  a  mine,  such  as  to  conduct 
a  general  store,  to  erect  and  maintain  dwelling-houses 
for  employes,  to  construct  and  operate  electric  or  other 
power  plants,  tramways,  etc.,  in  connection  with  the 
mining  enterprise,  it  is,  of  course,  necessary  that  these 
powers  should  be  conferred  upon  the  corporation 
through  its  charter. 

In  many  States  there  are  limitations  placed  upon 
corporations  owning  real  estate,  and  in  such  States 
care  must  be  exercised  not  to  violate  such  laws ;  for  it 
has  been  held  that  even  though  the  charter  is  granted 
for  purposes  that  are  prohibited  by  the  general  act 
under  which  such  corporations  are  created,  the  unlaw- 
ful acts  may  be  shown  to  defeat  the  corporation  when- 
ever it  attempts  to  enforce  such  illegal  objects.  In 
legal  phraseology,  corporations  may,  under  such  cir- 
cumstances, be  ' '  attacked  collaterally. ' ' 

The  following  may  be  considered  as  an  approved 
form  for  the  wording  of  the  objects  or  purposes  of  a 
mining  corporation  organized  under  the  laws  of  the 
State  of  Illinois  for  the  purpose  of  mining  coal : 

1  i  To  mine,  buy,  sell  and  deal  in  coal  and  its  by-prod- 
ucts; to  acquire  by  purchase,  lease  or  other  lawful 
means,  coal  lands  and  properties  necessary  and  con- 
venient for  the  construction,  successful  operation  and 
maintenance  of  coal  mines  and  their  equipment ;  and  to 
do  and  perform  any  and  all  lawful  things  incidental 


MINING  ENTEKPKISES. 

and  necessary  to   the   successful   operation  of  coa?. 
mines,  and  the  production  and  sale  of  coal." 

It  might  be  appropriate  to  add  that  the  implied 
powers  incident  to  corporate  existence  need  not  be 
stated  in  the  charter.  In  many  States  the  charter 
enumerates,  in  detail,  such  implied  powers,  while  such 
powers  are  left  to  implication  in  other  States,  and  in 
the  last  named  States  the  wording  of  the  purposes  or 
objects  may  be  limited  simply  to  the  principal  objects 
contemplated. 

In  relation  to  the  domicile  or  State  selected  for  the 
creation  of  a  mining  corporation,  the  observations 
hereinbefore  made  on  the  subject  are  applicable  alike 
to  such  corporations;  and  except  for  the  advantages 
to  be  derived  by  a  trial  in  the  Federal  courts  of  pos- 
sible litigation  for  personal  injuries  (as  well  as  other 
cases)  such  corporations  should  be  created  under  the 
laws  of  the  State  where  their  physical  operations  are  to 
be  conducted.  The  laws  of  such  States  are  invariably 
more  favorable  to  such  corporations,  and  particularly 
to  their  financing,  and  the  actual  executive  head  of  the 
enterprise,  or  business  office,  may  be,  and  usually  is  at 
a  distance  from  the  property  operated,  and  often  in 
another  State. 

The  law  relating  to  the  transfer  of  real  estate  gen- 
erally is  equally  applicable  to  the  construction  of  con- 
veyances and  contracts  relating  to  mining  rights;  but 


180  MINING  ENTEEPEISES. 

there  are  some  practical  and  legal  questions  which  will 
be  briefly  alluded  to,  as  being  particularly  important 
in  the  organization  and  promotion  of  mining  enter- 
prises. 

It  is  now  well-settled  law  in  the  United  States  that 
the  owner  of  the  surface  of  land  is  also  the  owner  of 
everything  beneath  it  to  the  center  of  the  earth.  A 
few  States  have  express  statutes  declaring  that  all 
minerals  underlying  lands  owned  by  citizens  of  foreign 
countries  belong  to  the  State;  and  the  rights  of  the 
Government  to  minerals  underlying  public  lands  may 
also  be  an  exception;  but  generally,  the  rule  is  as 
above  stated. 

In  the  wording  of  conveyances,  the  significance  of  the 
word  "  minerals  "  is  important,  as  it  has  been  held  that 
this  word  is  sufficiently  comprehensive  to  include  not 
only  gold,  silver,  iron,  coal,  etc.  (when  in  workable 
quantities)  but  it  also  includes  oil,  natural  gas  and 
stone.  Hence,  the  use  of  such  phrases  as  "mineral 
substances, "  "coal  and  other  minerals, "  "lead,  zinc 
and  other  minerals,"  etc.,  may  have  important  signifi- 
cance in  such  conveyancing. 

Another  important  feature  is  the  right  of  surface 
owners  with  relation  to  the  minerals  named.  Of 
course,  as  regards  coal,  iron  and  other  metals,  the 
minerals  are  co-extensive  with  the  surface.  In  the  case 
of  gas  and  oil  this  is  not  so.  An  operator  with  only 


MINING  ENTEBPKISES.  181 

sufficient  surface  to  accommodate  his  plant  may  reduce 
to  possession  as  much  oil  or  natural  gas  as  though  he 
owned  any  given  amount  of  surface. 

It  is  not  uncommon  for  extensive  mining  develop- 
ment to  be  done  under  a  royalty  lease,  and  without 
regard  to  consequences  of  adverse  decision  by  courts, 
in  possible  litigation  resulting  from  future  disagree- 
ment regarding  its  terms ;  and  without  taking  into  con- 
sideration the  future  possible  necessities  of  the  min- 
ing corporation.  It  is  equally  as  common  a  practice 
to  include  in  such  royalty  leases  a  provision  of  for- 
feiture in  case  of  a  breach  by  the  operator,  whereby 
all  improvements  and  development  work  (which  in- 
cludes the  shaft,  etc.)  will  revert  to  the  lessor,  or 
owner  of  the  land.  The  wisdom  of  purchasing  in  fee 
at  least  a  sufficient  amount  of  land  upon  which  the 
mine  is  to  be  sunk  and  the  plant  located,  cannot  be 
doubted;  and  the  advantages  thereby  acquired  should 
be  apparent  to  all  interested  in  such  an  undertaking. 
The  principal  investment  of  a  mining  corporation  is 
made  in  sinking  its  shaft,  and  the  construction  of  its 
mine  generally,  and  without  the  precaution  above  sug- 
gested an  almost  total  loss  can  occur  through  some 
informality  or  defect  made  in  the  royalty  lease  under 
which  such  development  has  been  made. 

It  is  customary  to  take  an  option  on  the  tract  of 
coal  or  other  mineral  lands  in  advance  of  their  pur- 


182  MINING  ENTEKPKISES. 

chase,  in  order  that  prospecting  may  be  done  to  ascer- 
tain the  extent  and  quality  of  the  mineral  before  pay- 
ing for  the  same.  In  the  Appendix  hereto  will  be 
found  an  approved  form  of  option  agreement  for  this 
purpose.*  This  form  supposes  payment  in  cash  for 
mineral  lands  or  minerals.  A  form  for  the  same  pur- 
pose, where  the  payments  are  to  be  made  in  cash,  and 
stock  of  the  corporation  to  be  formed  for  the  develop- 
ment of  the  property,  is  also  there  inserted.!  The  plan 
last  suggested  has  a  double  advantage  to  the  operator, 
one  in  reducing  the  cash  investment  in  the  minerals 
or  mining  rights,  and  the  other  in  the  securing  of 
local  interest  and  the  co-operation  of  their  owners. 

Frequently  it  is  deemed  advisable  or  necessary  to 
deposit  a  deed  or  place  the  title  papers  to  mineral 
lands  in  escrow  pending  the  prospecting  which  it  is 
deemed  necessary  to  do  to  establish  the  value  and 
extent  of  the  mineral  rights  so  conveyed,  or  for  va- 
rious other  reasons  or  purposes  which  may  arise.  In 
such  event  the  following  form  (with  such  modifications 
as  the  particular  circumstances  may  require)  will 
serve  as  a  guide  and  suggestion  for  the  purpose 
named : 

•Page  233.  t  Page  238. 


MINING  ENTEEPKISES.  183 

ESCROW  AGREEMENT. 

(To  be  written  on  envelope  or  other  enclosure  con- 
taining deed,  lease  or  contract.) 

The  enclosed  deed  (lease  or  contract)  of 

is  hereby  placed  in  the  possession  and  keeping  of 

,  in  escrow,  upon  the  follow- 
ing terms  and  conditions,  viz : 

If shall  place  or  cause  to  be  placed 

to  the  credit  of ,  in  the 

Bank  of on  or  before 190...., 

the  sum  of Dollars,  then  and  in  that 

event,  the  said is  hereby  authorized, 

empowered  and  directed  to  deliver  the  enclosed  deed 

(lease  or  contract)  to ,  or  to  whom 

he  may  in  writing  order.    In  case  the  said 

shall  not  so  place,  or  cause  to  be  placed  to  the  credit 

of  said in  said  Bank,  the  said  sum 

of Dollars,  on  or  before 

190....,  then  in  that  event  the  said is 

hereby  authorized  and  directed  to  return  the  enclosed 

deed  (lease  or  contract)  to  the  said or 

to  whomsoever  he  may  designate  in  writing. 

[SEAL.] 

[SEAL.] 

,  190 

The  preparation  of  conveyances,  and  all  mining  con- 
tracts (as  well  as  the  doing  of  all  things  pertaining 
to  the  formation,  and  bringing  into  legal  existence  of 
mining  corporations,  where  the  rights  of  the  individ- 


184  MINING  ENTEKPEISES. 

uals  are  to  be  conserved  and  protected)  must  neces- 
sarily receive  the  careful  attention  of  those  versed  in 
the  law,  as  well  as  the  financial  and  practical  needs  of 
such  undertakings  generally ;  and  incidentally  it  might 
be  said  that  there  are  no  places  in  business  affairs 
where  the  application  of  the  well-known  maxims, 
1  i  what  is  worth  doing  at  all,  is  worth  doing  well,  and 
all  good  work  must  be  paid  for;"  and  "a  man  who 
offers  his  services  at  a  specially  low  rate  generally 
puts  them  at  their  true  value" — are  exemplified  in 
the  performance  of  services  by  the  legal  profession 
of  this  character.  They  may  properly  be  termed  '  '  con- 
structive services,"  as  the  results  of  such  work  are 
productive  not  only  of  substantial  benefits  to  the  em- 
ployer but  to  the  investing  public  and  community  at 
large  as  well,  and  the  evolution  in  business  methods 
to  the  present  high  state  of  perfection  is  largely  due 
to  their  efforts. 


APPENDIX 


TABLE  OF  CONTENTS 
APPENDIX 

PAGE 

Explanation    v 189 

General  contract  between  incorporators  to  form  a  corporation. .  197 
Special  contract  between  incorporators  to  organize  a  corpora- 
tion for  the  purpose  of  purchasing  and  enlarging  a  busi- 
ness      201 

Reorganization    certificate 206 

Appraisal  of  property 208 

Resolution  ratifying  commissioners'  acts,  etc 209 

Receipt  by  commissioners  for  advance  payments  pending  or- 
ganization, with  assignment  thereof 211-213 

Installment  certificate  and  assignment  thereof 214-216 

General      By-Laws 217 

Assignment  of  invention  before  letters  patent  issue 227 

Assignment  of  undivided  interest  in  patent 229 

Assignment  of  entire  interest  in  patent 231 

Coal  option  with  deferred  payments 233 

Coal  option  with  stock  and  cash  plan 238 

Stockholders'    proxy 243 

Rules  governing  the  listing  of  stocks  and  bonds  on  the  Chi- 
cago   Stock    Exchange 245 

Synopsis  of  the  corporation   laws  of  New   Jersey,  Delaware, 

Maine  and  South  Dakota 247 

Act  regulating   the  admission   of   foreign   corporations   to   do 

business   in   Illinois 258 

Table  showing  earnings  on  stocks  and  bonds 263 

(187) 


EXPLANATION 

There  is  of  necessity  a  discrepancy  between  what 
is  recorded  and  what  is  to  be  desired  in  any  work  that 
undertakes  to  generalize  on  a  subject  so  extensive  as 
that  of  business  organization;  and  here  as  in  the  law 
the  exact  question  "at  issue "  is  rarely  discussed  or 
settled  by  precedent.  But  the  general  rules  and  modes 
of  procedure  herein  announced,  together  with  the  il- 
lustrations that  follow,  will  be  sufficient  to  enable  the 
resourceful  individual  to  avail  himself  of,  not  only 
the  plans  discussed,  but  suggest  others  that  will  meet 
his  particular  needs. 

Throughout  the  text  reference  has  been  made,  to 
various  illustrations  given  in  this  department  of  the 
book,  and  when  considered  in  conjunction  with  the 
text  on  the  subjects  referred  to,  they  may  be  ade- 
quately explained  to  enable  the  reader  to  appreciate 
their  application;  but  there  are  other  uses  and  pur- 
poses to  which  such  illustrations  may  be  adapted,  that 
require  further  comment  which  has  been  reserved  for 
this  particular  discussion. 

There  are  many  general  forms  published  and  now 
available  to  all  that  simply  illustrate  arbitrary  methods 
of  conducting  corporate  affairs;  but  such  forms,  are 
as  a  rule,  simply  the  author's  personal  methods  of 

(189) 


190  APPEXDIX. 

accomplishing  a  given  purpose,  which  might  be  done 
in  a  great  variety  of  ways,  and  which  would  he  equally 
effective  and  proper;  hence  no  attempt  will  be  made 
to  encumber  this  volume  with  miscellaneous  forms, 
but  only  those  which  may  be  of  special  value  as 
practical  illustrations. 

It  is  rarely  ever  safe  for  the  layman  to  undertake 
the  use  of  forms  in  any  event,  for  the  most  important 
questions  (which  would  only  occur  to  one  versed  in 
the  law)  may  thereby  be  overlooked;  a  careful  ex- 
amination however,  of  forms  and  illustrations  in  con- 
nection with  discussions  on  a  given  subject  of  this 
character,  is  of  value,  principally  to  enable  the  reader 
to  arrive  at  a  clear  and  proper  understanding  of  what 
may  be  done  in  a  given  case  or  under  other  conditions 
that  may  arise. 

The  illustrations  that  follow  are  what  may  be  termed 
unusual,  inasmuch  as  they  are  not  of  the  stereotyped 
variety  so  commonly  published  as  "forms". 

General  Contract  Between  Incorporators  to  Form 
a  Corporation.  This  illustrates  an  aproved  method 
of  taking  the  initial  step  in  forming  a  corporation 
under  the  laws  of  any  state.  With  such  a  contract 
the  incorporators  have  settled  all  preliminary  questions 
and  their  relative  rights  and  obligations,  both  to  one 
another  and  to  the  corporation  itself;  besides  it  places 
in  the  hands  of  the  attorney  who  is  to  organize  the  cor- 
poration, all  the  data  and  authority  which  he  will  re- 
quire, at  least  preliminary  to  the  application  for 
charter. 

The  use  of  this  contract,  while  not    essential    or 


APPENDIX.  191 

necessary,  (particularly  in  the  smaller  organizations) 
cannot  but  be  of  advantage  where  a  large  number 
of  incorporators  are  to  participate,  or  where  it  is 
desirable  that  the  parties  should  bind  themselves  in 
advance  of  actual  subscription  to  the  capital  stock. 

Should  special  plans  of  financing  be  desirable,  that 
fact  would  materially  change  the  phraseology  in  regard 
to  the  character  of  stock,  etc.,  and  necessarily  require 
the  attention  of  legal  counsel;  but  for  the  usual  and 
ordinary  case,  this  illustration  may  readily  be  adapted 
and  prove  a  well  devised  plan  to  facilitate  the  organi- 
zation of  business  corporations  generally. 

Special  Contract  Between  Incorporators  for  the 
Purpose  of  Purchasing  and  Enlarging  a  Business. 
This  illustration  is  susceptible  to  almost  unlimited 
adaptation.  The  elasticity  of  the  corporate  form, 
as  hereinbefore  explained,  has  suggested — and  the  same 
will  continue  to  further  develop — means  of  adjusting 
the  rights  of  owners  of  property  and  investors,  which 
enable  both  to  accomplish  almost  any  desired  result. 

The  illustration  here  shows  a  case  where  the  owner 
of  a  manufacturing  plant,  and  individuals  with  capital 
join  forces  in  a  corporation  which  is  to  own  and 
operate  the  business  formerly  owned  by  such  in- 
dividual. By  this  method  it  will  be  seen  that  the 
owner  of  the  supposed  business  is  materially  benefited 
by  the  transaction,  and  the  individuals  furnishing  the 
capital  may  be  adequately  protected  in  their  invest- 
ments. 

It  will  be  readily  suggested  to  the  most  casual  reader 
that  this  plan  may  also  be  utilized  in  effecting  the  sale 


192  APPENDIX. 

of  a  business  either  immediately  or  after  the  corpora- 
tion is  organized  and  tinder  operation.  Such  sale 
can  be  made  by  the  transfer  of  stock  of  the  former 
owner  of  the  plant ;  and  under  ordinary  circumstances, 
his  stock  (received  for  the  plant)  should  be  of  greater 
value  than  the  plant  in  his  hands  before  organization. 
Besides,  a  sale  should  be  more  readily  effected  after 
organization  than  before. 

Here,  we  also  see  a  practical  illustration  of  the  op- 
portunity to  capitalize  and  reduce  to  a  substantial 
property  right,  the  good-will  and  trade  name  of  the 
business,  all  of  which  would  be  of  little  or  no  money 
value  unless  protected  in  this  way. 

What  has  already  been  said  on  the  subject  of  cor- 
porate financing,  will  enable  the  reader  to  apply  the 
various  suggestions  offered  to  meet  the  requirements 
of  any  condition  arising  in  the  practical  use  of  this 
illustration,  where  a  going  business  is  to  be  purchased 
or  taken  over  by  a  corporation  when  formed  for  that 
purpose. 

Reorganization  Certificate.  The  use  of  this  in- 
strument is  referred  to  in  the  text  as  applicable  in  a 
reorganization  of  an  existing  corporation  where 
reasons  exist  for  the  same.  The  signing  of  such  a 
certificate  in  duplicate  and  the  surrender  of  the  stock 
certificates  held  by  the  stockholder,  places  in  the  hands 
of  the  trustee  selected,  ample  authority  to  proceed 
with  such  reorganization  along  the  lines  agreed  upon 
and  set  forth  in  the  reorganization  certificate,  and 
such  terms  may  be  whatever  the  particular  circum- 


APPENDIX.  193 

stances  demand  or  the  individuals  interested  may 
impose. 

This  method  has  proven  to  be  advantageous  (from 
the  reorganized  standpoint  at  least)  in  a  number 
of  important  cases.  One  of  the  chief  obstacles  in  the 
way  of  the  reorganization  of  a  corporation,  where  a 
large  number  of  stockholders  exist,  is  the  fact  that  a 
few  minority  stockholders  may  greatly  hinder  or 
prevent  the  accomplishment  of  such  an  object  and 
involve  the  corporation  in  expensive  litigation  should 
an  attempt  be  made  by  the  officers,  or  those  in  control 
to  force  a  reorganization;  in  adopting  the  method  sug- 
gested, the  reorganization  may  be  placed  in  the  hands 
of  a  disinterested  person,  and  neither  the  stockholders 
nor  the  corporation  become  involved  in  the  attempt; 
and  besides,  this  method  enables  the  reorganizers  to 
negotiate  and  treat  with  each  stockholder  separately, 
and  to  prevent  undue  advantage  being  taken  by  any 
signer  of  this  certificate  after  the  same  is  executed. 

Here,  as  in  the  illustration  last  referred  to,  many 
additional  terms  and  conditions  may  be  added  to  meet 
the  requirements  of  any  case,  such  as  the  issuance  of 
preferred  or  other  special  stock  or  bonds,  and  the 
relinquishing  of  the  rights  of  the  holders  of  stock  for 
such  special  stock  or  bonds,  or  the  making  of  a  trust 
company  the  trustee  for  the  stockholders  or  corpora- 
tion as  the  case  may  be;  and  the  depositing  of  stock 
with  such  trust  company  in  exchange  for  special 
Trustee  Certificates  or  receipts  is  a  common  practice, 
particularly  among  large  corporations,  where  a  sale 
of  the  entire  assets  to  another  corporation  in  exchange 


194  APPENDIX. 

for  its  stock  is  to  be  effected,  or  a  change  in  the 
financial  plans  are  desired. 

Where  the  owner  of  a  business  desires  to  ultimately 
dispose  of  his  interest  therein,  or  in  case  the  re- 
organizers  of  a  business  desire  to  provide  for  the 
payment  of  the  purchase  money  of  the  tangible  assets 
of  a  business  reorganized,  without  encumbering  the 
same  by  a  mortgage  to  secure  a  bond  issue,  it  has 
often  proven  advantageous  within  the  experience  of 
the  author  to  provide  for  special  stock,  such  as  is 
referred  to  in  the  text,  as  being  preferred  as  to 
dividends  and  assets,  or  to  create  still  another  species, 
i.  e.  a  special  obligation  in  the  nature  of  stock,  whereby 
the  corporation  obligates  itself  to  pay  a  certain 
dividend  each  year  on  such  shares  (out  of  the  profits) 
and  not  to  exceed  a  certain  specified  dividend  on  the 
other  stock  of  the  corporation,  then  any  surplus  re- 
maining after  the  payment  of  such  dividends  must  be 
paid  to  the  holders  of  such  special  certificates  from 
year  to  year,  until  the  same  have  been  retired. 

In  the  hypothetical  case  given  in  the  reorganization 
certificate  above  referred  to,  the  corporation  to  be  re- 
organized is  supposed  to  be  a  foreign  corporation,  and 
one  of  the  principal  objects  to  be  attained  is  a  reduction 
of  its  capitalization  and  otherwise  placed  upon  a  sane 
working  basis. 

Appraisal  of  Property.  This  form  may  be  utilized 
and  adopted  by  either  a  Board  of  Directors  in  their 
official  capacity,  or  by  disinterested  persons  in  ap- 
praising property,  and  form  the  basis  of  a  resolution 


APPENDIX.  195 

for  purchasing  an  established  business  or  property  for 
the  use  of  a  corporation. 

Where  such  appraisal  has  been  made  in  detail,  that 
is,  where  an  itemized  schedule  of  the  property  ap- 
praised is  made,  this  should  be  attached  and  referred 
to,  in  the  appropriate  part  of  the  narrative,  in  relation 
to  the  subject  matter  of  the  appraisal. 

Appraisal  companies  usually  have  approved  forms 
for  setting  up  and  classifying  assets,  that  make  the 
form  referred  to  here,  applicable  as  a  summary  and 
convenient  as  a  basis  for  the  resolution  following. 

Resolution  Ratifying  Commissioners'  Acts,  Etc. 
This  resolution  is  sufficient  for  the  use  of  Directors 
(when  ratifying  the  acts  of  the  commissioners  appointed 
by  the  Secretary  of  State  in  advance  of  complete  or- 
ganization, as  in  Illinois)  or  where  property  has  been 
taken  and  the  purchase  price  has  been  paid  in  whole 
or  part  with  stock  of  the  corporation,  and  the  amount 
agreed  upon  credited  on  the  stock  subcription  accounts 
of  the  owners  of  the  property  conveyed. 

Installment  Certificate  and  Assignment.  Such  a 
certificate  as  is  here  suggested  is  frequently  issued  by 
mining  corporations,  or  those  interested  in  disposing 
of  a  portion  of  the  capital  stock  after  the  corporation 
is  formed.  Its  issuance  will  prevent  stockholders 
offering  for  sale  or  disposing  of  their  stock,  pending 
the  period  reserved  for  the  sale  of  the  stock  remaining 
in  the  Treasury  of  the  corporation. 

General  By-Laws.  Where  the  by-laws  of  a  corpora- 
tion or  the  permanent  features  thereof  are  made  a 
part  of  the  charter,  the  form  here  suggested,  with 


196  APPENDIX. 

such  modifications  and  conditions  as  the  incorporators 
may  desire,  can  be  adopted  by  the  stockholders;  but 
where  the  adoption  of  by-laws  is  left  to  the  Board  of 
Directors  of  the  corporation  after  they  are  elected, 
(as  in  Illinois)  such  by-laws  should  be  presented  to 
the  Board,  and  formally  adopted  by  it  at  the  first 
meeting  after  the  Certificate  of  Complete  Organization 
or  charter,  has  been  filed  for  record  in  the  proper 
recording  office  of  the  state  creating  the  corporation. 

Innumerable  additions  or  changes  may  be  made  to 
meet  the  requirements  of  incorporators;  but  the  form 
here  suggested  with  such  modifications  as  will  fit  the 
particular  case,  is  adequate  for  the  needs  of  the  or- 
dinary business  corporation. 

The  importance  of  by-laws  has  already  been  given 
in  the  text.  So  far  as  their  legal  necessity  is  con- 
cerned, their  primary  function  is  to  control  and 
authorize  the  time  and  method  of  calling  and  holding 
meetings;  without  them  great  inconvenience  may  re- 
sult and  expense  be  necessary  to  give  the  actual  notice 
which  the  law  requires,  where  there  are  no  provisions 
made  for  otherwise  serving  such  notice  by  the  corpora- 
tion, through  its  by-laws. 

The  remaining  forms  and  illustrations  are  given  for 
the  convenience  and  ready  use  of  incorporators;  in- 
dividual reference  to  them  is  deemed  unnecessary  and 
impracticable  within  the  limitations  of  this  volume. 


GENERAL  CONTRACT 

TO 
FORM  A  CORPORATION 

THIS  AGREEMENT  made  this  first  day  of  November, 
A.  D.,  1909,  by  and  between  the  undersigned,  John 
Brown,  William  Burbank,  Edward  Cunningham  and 
Raymond  Williams,  all  of  the  City  of  Chicago  and 
State  of  Illinois. 

WITNESSETH,  That  in  consideration  of  the  mutual 
undertakings  and  agreements  of  the  parties  hereto, 
as  hereinafter  set  forth,  and  in  further  consideration 
of  the  sum  of  one  dollar  by  each  of  the  said  parties 
to  the  other  in  hand  paid  (at  the  time  of  the  execution 
hereof),  the  receipt  of  which  is  hereby  severally 
acknowledged,  the  said  parties  to  this  contract  hereby 
agree  by  and  among  themselves  and  with  each  other 
as  follows,  to-wit: 

First,  That  a  corporation  shall  be  formed  by  us  un- 
der the  laws  of  Illinois  substantially  as  follows : 

(a)  The  name  thereof  to  be  the  Perfect  Automobile 
Company. 

(b)  The  capital  stock  of  said  corporation  to  be  One 
Hundred  Thousand  ($100,000.00)  Dollars,  divided  into 
one  thousand  (1,000)  shares  of  One  Hundred  ($100.00) 
Dollars  each,  said  stock  to  be  all  Common  Stock  of 
uniform  character  and  usual  form. 

(c)  The  purpose  of  said  corporation   to    be    sub- 

(197) 


198  APPENDIX. 

stantially  for  the  manufacture  and  sale  of  automobiles 
and  their  parts. 

(d)  Said  corporation  shall  have  a  Board  of  Directors 
consisting  of  five  in  number,  who  shall  all  be  stock- 
holders of  record  at  the  time  of  their  election. 

(e)  The  officers  of  said    corporation    shall    be    a 
President,  Vice-President,  Secretary,  Treasurer  and 
General  Manager. 

(f )  The  location  of  the  principal  office  to  be  at  Chi- 
cago. 

(g)  The  duration  of  said  corporation  to  be  99  years. 
Second,  We  hereby  agree  with  each  other,  and  the 

one  with  the  other,  that  we  will  take  the  number  of 
shares  of  the  capital  stock  of  said  corporation  set  op- 
posite our  respective  names  hereunto  subscribed,  and 
will  pay  to  the  commissioners  duly  appointed  by  the 
Secretary  of  State  of  Illinois  in  that  behalf,  fifty 
(50%)  per  cent,  of  the  par  value  of  the  said  shares  so 
subscribed  by  us  respectively  at  the  time  of  holding 
the  first  meeting  of  the  said  subscribers  to  elect  a 
Board  of  Directors  for  said  corporation;  and  we 
further  agree  to  pay  the  balance  of  our  said  subscrip- 
tions whenever  called  upon  so  to  do  by  the  Board 
of  Directors  of  said  corporation,  after  the  same  shall 
be  formed. 

Third,  We  further  nominate,  constitute  and  appoint, 

(—  )   as  our  (attorney  or)   agent,  and  the 

agent  (or  attorney)  of  the  said  corporation  so  to  be 
formed,  to  create  or  cause  to  be  created  the  said  cor- 
poration in  accordance  with  the  laws  of  Illinois  and  this 


APPENDIX. 


199 


agreement,  and  to  do  and  perform  all  things  necessary 
to  bring  said  corporation  into  legal  existence ;  and  we 
further  authorize  and  empower  our  said  agent  (or 
attorney)  to  draw  on  the  funds  in  the  hands  of  the 
legally  constituted  officers  or  agents  of  said  corpora- 
tion, for  the  necessary  expenses  attending  said  incor- 
poration, and  we  further  agree  that  any  and  all  con- 
tracts which  our  said  (attorney  or)  agent  may  make  in 
such  matter  shall  be  binding  upon  said  corporation  and 
also  upon  us  jointly  and  severally. 

IN  WITNESS  WHEREOF,  we,  the  undersigned,  hereby 
severally  bind  ourselves,  our  heirs,  executors  and  ad- 
ministrators. 


NAME 

ADDKESS 

SHARES 

AMOUNT 



SPECIAL  CONTRACT 

TO 
FORM  A  CORPORATION 

THIS  AGREEMENT  made  and  entered  into  this  first 
day  of  December  A.  D.,  1909,  by  and  between  John 
Brown,  party  of  the  first  part,  and  William  Burbank, 
Edward  Cunningham,  Frank  Smith  and  Eaymond  Will- 
iams, parties  of  the  second  part,  all  residents  of  the 
City  of  Chicago  in  the  State  of  Illinois : 

WITNESSETH,  THAT  WHEREAS,  the  said  party  of  the 
first  part  is  the  owner  of  and  now  operating  under  his 
own  name,  the  manufacturing  plant  and  business 
located  at  279  Michigan  Avenue  in  the  City  of  Chicago, 
said  business  consisting  of  special  tools  and  machinery 
for  the  manufacture  of  automobiles  and  their  parts, 
and  also  a  stock  of  raw  material  for  the  conduct  of 
said  business,  as  well  as  various  new  and  second  hand 
machines  particularly  enumerated  and  set  forth  in  the 
inventory  attached  hereto  marked  ' l  Exhibit  A  " ; 

AND  WHEREAS,  the  said  parties  of  the  second  part  are 
desirous  of  becoming  interested  in  and  identified  with 
said  business  on  substantially  the  following  terms 
and  conditions: 

Now,  THEREFORE,  IT  is  HEREBY  AGREED  :  That  in  con- 
sideration of  the  mutual  undertakings  and  agreements 
of  the  parties  hereto,  as  hereinafter  set  forth,  and  in 
further  consideration  of  the  sum  of  One  Dollar  by  each 

(201) 


202  APPENDIX. 

of  the  said  parties  to  the  other  in  hand  paid  (at  the 
time  of  the  execution  hereof),  the  receipt  of  which  is 
hereby  severally  acknowledged,  the  said  parties  of  this 
contract  hereby  agree  by  and  among  themselves  and 
with  each  other  as  follows,  to- wit : 

First,  that  a  corporation  shall  at  once  be  formed  by 
us  under  the  laws  of  Illinois  substantially  as  follows: 

(a)  The  name  thereof  to  be  The  Perfect  Automobile 
Company. 

(b)  The  capital  stock  of  the  said  corporation  to  be 
Two  Hundred  Thousand  ($200,000.00)  Dollars,  divided 
into  Two  Thousand  (2000)   shares    of    one   hundred 
($100.00)  Dollars  each,  said  stock  to  be  all  common 
stock  of  uniform  character  and  usual  form. 

(c)  The  purpose  of  said  corporation  to    be    sub- 
stantially for  the  manufacture,  purchase  and  sale  of 
automobiles  and  their  parts. 

(d)  Said  corporation  shall  have  a  Board  of  Directors 
consisting  of  five  in  number,  who  shall  all  be  stock- 
holders of  record  at  the  time  of  their  election. 

(e)  The  officers  of  said  corporation  shall  be  a  Pres- 
ident,    Vice-President,     Secretary,     Treasurer     and 
General  Manager. 

(f )  The  location  of  the  principal  office  to  be  at  Chi- 
cago. 

(g)  The  duration  of  said  corporation  to  be  99  years. 
Second,  the  parties  hereto  agree  to  subscribe,  take 

and  pay  for  the  said  shares  of  stock  in  the  following 
proportion  and  manner,  namely :  said  party  of  the  first 

part  shall  subscribe  for shares  of  said  capital 

stock;  the  balance  of  said  shares  of  stock  shall  be  sub- 


APPENDIX.  203 

scribed  for  by  the  said  parties  of  the  second  part  as 

follows:  said  Burbank shares,  said  Cunningham 

shares,  said  Smith shares,  and  said  Will- 
iams  shares. 

Third,  the  said  parties  of  the  second  part  severally 
agree  to  pay  unto  the  Commissioners  appointed  by  the 
Secretary  of  State  of  Illinois,  for  the  benefit  of  said 
proposed  corporation,  fifty  (50%)  per  cent  of  the  par 
value  of  said  shares  of  stock  so  subscribed  for  by  them 
at  the  time  and  whenever  the  said  commissioners  shall 
convene  and  hold  the  first  meeting  of  the  subscribers 
of  said  capital  stock,  and  they  further  agree  to  pay 
the  balance  remaining  due  and  unpaid  upon  said 
shares  so  subscribed  for  by  them  in  cash  into  the 
Treasury  of  said  corporation,  as  soon  as  they  may 
be  called  upon  so  to  do  by  the  Board  of  Directors  of 
said  Corporation  when  formed. 

Fourth,  as  soon  as  said  corporation  shall  be  fully 
organized  the  said  party  of  the  first  part  hereby  agrees 
to  convey,  by  good  and  sufficient  instrument  of  con- 
veyance a  clear  and  perfect  title  to  said  manufacturing 
plant  and  business  as  enumerated  and  set  forth  in  the 
inventory  attached  hereto  as  Exhibit  "A",  aforesaid, 

and  to  accept  in  payment  therefor  ( )  shares 

of  the  capital  stock  of  said  corporation  at  its  par  value, 

namely  ( )  Dollars,  and  the  balance  of  said 

purchase  money  for  said  manufacturing  plant  and  as- 
sets amounting  to Dollars,  in  cash;  the  same  to 

be  paid  upon  the  tendering  of  a  good  and  legal  convey- 
ance of  said  plant  and  assets  by  the  said  party  of  the 
first  part,  to  said  corporation  when  formed. 


204  APPENDIX. 

Fifth,  it  is  agreed  between  the  parties  hereto  that 
said  parties  shall  constitute  the  first  Board  of  Directors 
of  said  corporation,  and  that  in  consideration  of  the 
experience  and  former  connection  with  the  said 
business  by  the  said  party  of  the  first  part,  that  he 
shall  be  the  General  Manager  of  the  same  and  receive  a 
salary  from  said  corporation  for  his  services  in  that  be- 
half amounting  to Dollars  per  annum,  payable  in 

equal  monthly  installments  of Dollars  per  month, 

and  that  a  contract  shall  be  made  between  the  said 
corporation  and  the  said  party  of  the  first  part 
whereby  his  said  services  as  General  Manager  shall 
be  so  secured  and  continued  for  a  period  of  two  (2) 
years  from  and  after  the  incorporation  of  said  com- 
pany as  aforesaid ;  that  as  said  General  Manager  said 
party  of  the  first  part  shall  employ  all  labor  and  pur- 
chase all  material  and  supplies  necessary  for  the  con- 
duct of  said  business,  and  have  general  supervision  of 
the  mechanical  department  thereof  subject  to  the 
control  of  the  Board  of  Directors ;  and  that  said  party 
of  the  first  part  shall  devote  his  entire  time,  attention 
and  best  endeavors  to  the  business  of  said  corporation 
for  and  during  the  period  aforesaid. 

Sixth,  it  is  understood  and  agreed  that  the  said  party 
of  the  first  part  shall  assume  and  pay  all  outstanding 
obligations  of  every  kind  and  nature  existing  at  the 
time  of  the  sale  and  conveyance  of  said  manufacturing 
plant  as  aforesaid,  and  that  he  is  to  retain  only  the 
current  book  accounts  and  monies  due  the  said 
business  at  the  time  of  said  conveyance  aforesaid; 
that  all  other  kinds  of  property  and  property  rights 


APPENDIX.  205 

now  owned  and  enjoyed  by  said  business,  including 
its  good-will,  shall  be  legally  conveyed  and  inure  to 
the  said  corporation  when  formed,  and  that  he  shall 
warrant  and  defend  the  title  to  said  business  and  as- 
sets against  all  claims  whatsoever. 

Seventh,  we  further  nominate,  constitute  and  ap- 
point  ,  as  our  (attorney  or)  agent,  and  the  agent 

(or  attorney)  of  the  said  corporation  so  to  be  formed, 
to  create  or  cause  to  be  created  the  said  corporation 
in  accordance  with  the  laws  of  Illinois  and  this 
agreement,  and  to  do  and  perform  all  things  necessary 
to  bring  said  corporation  into  legal  existence ;  and  we 
further  authorize  and  empower  our  said  agent  (or  at- 
torney) to  draw  on  the  funds  in  the  hands  of  the  legally 
constituted  officers  or  agents  of  said  corporation,  for  the 
necessary  expenses  attending  said  incorporation,  and 
we  further  agree  that  any  and  all  contracts  which  our 
said  (attorney  or)  agent  may  make  in  such  matter 
shall  be  binding  upon  said  corporation  and  also  upon 
us  jointly  and  severally. 

THIS  CONTKACT  shall  be  binding  upon  the  heirs,  exec- 
utors, administrators,  successors  and  assigns  of  the 
respective  parties  hereto. 

IN  WITNESS  WHEREOF  the  parties  hereto  have  here- 
unto set  their  hands  and  seals  the  day  and  year  first 
above  written. 


206  APPENDIX. 


BEOKGANTZATION  CERTIFICATES. 

THIS  is  TO  CERTIFY  That  Eichard  Eoe  of  Chicago, 
Illinois  (hereinafter  designated  as  the  transferor), 
has  transferred  and  delivered  to  William  Smith  (here- 
inafter designated  as  the  transferee),  Certificate  No. 
23  for  1,000  shares  of  the  capital  stock  of  THE  DOE 
ELECTRICAL  MFG.  Co.,  for  the  purposes  and  upon  the 
conditions  following,  viz.: 

First.  That  the  transfer  above  named  is  made  to 
enable  the  said  transferee  to  effect  a  reorganization 
of  the  said  company,  by  reincorporating  the  same 
under  the  laws  of  the  State  of  Illinois;  said  Illinois 
corporation  to  be  known  by  the  same  or  similar  name 
as  the  present  organization,  and  to  have  a  capital 
stock  of  $125,000;  that  the  new  corporation,  when 
formed,  shall  have  $10,000  in  cash  paid  in  its  treasury, 
after  all  obligations  of  the  present  company  are  dis- 
charged; and  also  to  have  in  its  treasury  $15,000 — 
face  value — of  its  capital  stock  for  sale,  at  par;  that 
said  corporation,  when  reorganized  by  said  trans- 
feree, shall  possess  and  own  by  transfer  from  the 
Board  of  Directors  of  the  present  corporation  all  the 
assets  thereof. 

Second.  That  the  said  transferee  agrees  to  de- 
liver, and  the  said  transferor  agrees  to  receive,  in 
lieu  of  said  stock  certificate,  a  new  certificate  in  the 
said  reorganized  company,  for  50  shares  of  its  capi- 
tal stock  at  the  par  value  of  $10.00  per  share,  fully 
paid  and  non-assessable. 

Third.  It  is  further  understood  that  this  agree- 
ment is  made,  and  the  said  reorganization  is  contem- 
plated, for  the  purpose  of  discharging  the  obligations 
of  the  said  THE  DOE  ELECTRICAL  MFG.  Co.,  and 
to  preserve  its  assets  for  the  benefit  of  all  its  stock- 


APPENDIX.  207 

holders,  equally,  and  that  to  accomplish  said  objects 
the  said  transferee  is  hereby  vested  with  all  the 
powers  and  rights  of  ownership,  in  and  to  the  said 
stock  so  transferred,  and  with  full  power  to  consum- 
mate said  reorganization  in  accordance  herewith. 

Fourth.  It  is  further  agreed  that  the  said  trans- 
feree shall  perfect  said  reorganization,  as  soon  as 
may  be  after  all  the  outstanding  stock  in  the  present 
corporation  is  transferred  and  surrendered  under  the 
terms  of  this  certificate;  that  upon  his  failure  or  ina- 
bility so  to  do,  within  a  reasonable  time,  he  shall  re- 
deliver  and  transfer  said  certificate  to  the  said  trans- 
feror. 

IN  TESTIMONY  WHEBEOF,  the  said  parties  hereto,  have 
hereunto  set  their  hands,  and  affixed  their  seals,  at  Chi- 
cago, Illinois,  this  4th  day  of  May,  A.  D.  1907. 

KICHAKD  EOE,         [SEAL.] 
"WILLIAM  SMITH,     [SEAL.] 


208  APPENDIX. 

FOBM  OF  APPRAISAL  OP  PROPERTY,  TO  BE  ACCEPTED  BY  A 
CORPORATION  IN  PAYMENT  FOB  STOCK. 

CHICAGO,  ILLINOIS,  May  12th,  1907. 
We,  the  undersigned  commissioners,*    (heretofore, 
on  the  29th  day  of  April,  1907,  appointed  by  the  Sec- 
retary of  State  of  Illinois), having  carefully  examined, 
investigated  and  valued  the  plant,  machinery,  assets 
and  good  will  of  the  business,  heretofore  owned  and 
controlled  by  The  Doe  Electrical    Mfg.    Co.,  of    333 
Plymouth  Avenue,  in  the  City  of  Chicago,  do  appraise 
said  assets  of  said  business  as  follows: 
Machinery,    tools,    lathes,    presses,    etc., 
etc.,  as  per  inventory  attached  hereto, 

marked  Exhibit  "A" $64,900.00 

Stock  of  finished  and  unfinished  product 
and  merchandise,  as  per  inventory  at- 
tached hereto,  marked  Exhibit  "B" . .       25,400.00 
Office  outfit  and  fixtures   as  per  inven- 
tory attached  hereto,   marked   Exhibit 

"C"    1,200.00 

Good  will  and  intangible  rights  as  per  as- 
signments and  conveyances  hereto  at- 
tached, marked  Exhibits  "D,"  "E" 
and  "F"  8,500.00 


Total  appraised  value $100,000.00 

Eespectfully  submitted, 

WILLIAM  JOHNSON,  |  Commissioners 

HENRY  SMITH,  X  (or  Board  of  Directorg). 

HENRY  JONES,  ; 

*By  here  substituting  the  word  Directors,  In  place  of  the  word  Commis- 
sioners the  form  may  also  be  utilized  by  them. 


APPENDIX. 


209 


RESOLUTION  RATIFYING  COMMISSIONERS'  ACTS  IN  AP- 
PRAISING AND  ACCEPTING  ASSETS  TO  BE  TURNED  IN  TO 
A  CORPORATION,  IN  EXCHANGE  FOR  STOCK,  UPON  A  RE- 
ORGANIZATION. 

WHEREAS,  This  company  was  organized  for  the 
purpose  of  engaging  in  the  manufacture  and  sale  of 
electrical  appliances  and  supplies,  and  particularly  to 
acquire,  own  and  operate  the  business  heretofore 
owned  and  conducted  by  The  Doe  Electrical  Mfg.  Co., 
at  333  Plymouth  Avenue,  in  the  City  of  Chicago,  and 

WHEREAS,  It  appearing  to  the  Board  of  Direct- 
ors of  this  company  that  the  commissioners,  hereto- 
fore on  to-wit :  the  9th  day  of  May,  1907,  appointed  by 
the  Secretary  of  State  of  Illinois  to  open  books  of 
subscription  to  the  capital  stock  of  this  company,  did 
in  accordance  with  their  authority  and  duty  in  the 
premises  on  to-wit:  the  21st  day  of  May,  1907,  ap- 
praise and  take  over,  as  such  commissioners  and  trus- 
tees for  this  company,  the  plant,  business  and  assets  of 
The  Doe  Electrical  Mfg.  Co.,  and  are  now  holding  the 
same  as  such  commissioners  and  trustees  subject  to 
the  action  of  this  Board;  and, 

WHEREAS,  It  further  appears,  from  the  minutes 
and  proceedings  of  said  commissioners,  recorded  in 
the  minute  book  of  this  company,  that  said  plant  and 
assets  were  duly  appraised  and  valued  at  the  sum  of 
One  Hundred  Thousand  ($100,000)  Dollars,  and  that 
the  said  appraisal  and  valuation  were  carefully  and 
properly  made,  and  the  valuation  placed  thereon  is, 
in  the  judgment  of  this  Board,  fair  and  reasonable; 
and, 

WHEREAS,  Said  property  and  assets  have  been 
re-appraised  by  this  Board,  and  valued  at  said  sum 


210  APPENDIX. 

of  One  Hundred  Thousand  ($100,000)  Dollars,  and  it 
is  the  concensus  of  opinion  of  this  Board  that  the  ac- 
quiring of  said  property  is  essential  to  the  best  inter- 
ests of  this  company,  in  order  that  it  may  become  im- 
mediately a  going  and  paying  concern. 

Therefore,  be  it  Resolved,  That  this  company  do 
purchase  of  the  said,  The  Doe  Electrical  Mfg.  Co., 
through  said  commissioners,*  the  said  goods,  chat- 
tels and  property  mentioned  and  set  forth  in  the 
minutes  and  proceedings  of  the  said  commissioners 
herein  recorded,  and  set  forth  in  the  bill  of  sale  ac- 
companying said  transfer  to  them,  from  said,  The 
Doe  Electrical  Mfg.  Co.,  and  that  the  action  of  said 
commissioners  in  the  premises  be  and  the  same 
is  in  all  respects,  hereby  ratified,  confirmed  and 
adopted;  and  that  the  President  and  Secretary  of  this 
company  be,  and  they  are  hereby  authorized,  em- 
powered and  directed  to  issue  on  behalf  of  this  com- 
pany, ten  thousand  (10,000)  shares  of  its  capital  stock 
at  par,  to  the  several  stockholders  of  The  Doe  Elec- 
trical Mfg.  Co.,  as  their  rights  appear  by  the  terms  of 
said  sale,  and  in  accordance  with  the  resolution  of 
the  Board  of  Directors  of  said,  The  Doe  Electrical 
Mfg.  Co.,  conveying  said  property  to  said  commis- 
sioners, in  payment  for  said  goods,  chattels,  and 
property,  and  the  Treasurer  of  this  company  is  also 
hereby  authorized  and  directed  to  credit  the  said  sum 
of  One  Hundred  Thousand  ($100,000)  Dollars  upon 
the  subscription  of  William  Smith  to  the  capital  stock 
of  this  company  heretofore  made  by  him. 

*  Or  Directors. 


APPENDIX. 


211 


RECEIPT  TO  BE  ISSUED  BY  THE  COMMISSIONEKS  IN  ILLINOIS 
(OB  BY  A  TBUSTEE  IN  ANY  STATE)  FOB  PAYMENT  ON 
ACCOUNT  OF  STOCK  SUBSCRIPTION,  IN  ADVANCE  OF 
COMPLETE  OBGANIZATION. 


No 


Shares, 


Name 


No.. 


No.  of  shares. 


$ 


THE  JOHN  DOE  ELECTEIC  Co., 
Chicago. 


THIS  CERTIFIES,  that 
..of.. 


being  an  original  subscriber  for 

shares  of  the  capital  stock 

of  THE  JOHN  DOE  ELECTRIC  Co. 
(a  corporation  in  process  of  or- 
ganization under  the  laws  of  the 
State  of  Illinois),  at  its  par  value 
of  $10.00  per  share,  has  paid  to 
us,  as  commissioners,  duly  ap- 
pointed by  the  Secretary  of  State 
of  Illinois  (and  also  trustees), 
for  said  corporation,  the  sum  of 

dollars,  to  apply  on 

account  of  said  subscription,  in 
accordance  with  its  terms,  the 

same    being #    of    the    total 

amount  thereof. 
THIS  RECEIPT  is  ISSUED  on  be- 


212 


APPENDIX. 


Amount, 


Installment, 


Date, 


190.. 


half  of  said  THE  JOHN  DOE  ELEC- 
TKIC  Co.,  and  upon  the  condition 
that  as  soon  as  the  said  corpora- 
tion is  fully  organized,  that  said 
payment  hereby  acknowledged 
will  be  credited  on  the  said  sub- 
scription, and  that  upon  the  sur- 
render of  this  receipt  by  the 
owner  thereof,  and  the  payment 
of  the  balance  due  upon  said  sub- 
scription, according  to  its  terms, 
a  regular  and  duly  executed  stock 
certificate  of  said  corporation  will 
be  issued  to  the  said  subscriber 
or  his  assignee. 
Dated  at  Chicago,  Ills.,  this 

day   of A.    D., 

190... 

I  Commissioners 
f  (or  Trustees). 


APPENDIX.  213 

ASSIGNMENT  or  THE  FOREGOING  COMMISSIONED'   BE- 

CEIPT     AND     THE     SUBSCRIPTION     IlNDEB     WHICH     THE 

SAME  is  ISSUED. 

FOR  VALUE  EECEIVED hereby  sell, 

assign  and  transfer  unto 

all  my  rights,  title  and  in- 
terest in  and  to  the  subscription  heretofore  made  by 

me  to shares  of  the  capital  stock  of  THE  JOHN 

DOE  ELECTKIC  Co.,  together  with  the  payment 
made  thereon,  as  evidenced  by  the  within  Commis- 
sioners '  receipt. 

This  assignment  and  transfer  is  made  upon  and  in 
accordance  with  the  terms  and  conditions  of  my  said 
subscription,  and  I  do  hereby  authorize  and  instruct 
the  duly  authorized  officers  of  said  corporation  to 
issue  the  stock  subscribed  for  by  me,  to  the  order  of 

my  said  assignee  upon compliance  with 

all  the  conditions  of  my  said  subscription  and  the  due 
surrender  of  this  certificate. 

Dated  at this day  of 

A.  D.  190 

[SEAL.] 
Witness, 


214 


APPENDIX. 


INSTALLMENT  CEKTIFICATE,  FOB  USE  OF  A  CORPORATION 
WHEN  SELLING  STOCK  TO  BE  PAID  FOR  IN  INSTALL- 


MENTS. 


No., 


Shares, 


Name, 


Kec'd  on  Acc't. 


No 


Shares 


THE  JOHN  DOE  ELECTRIC  Co., 
CHICAGO. 


$ 


THIS  CERTIFIES  that 

,  a  subscriber  for 

Shares  of  the  Capital  Stock  of 
THE  JOHN  DOE  ELECTRIC  Co.,  at 
its  par  value  of  $10.00  per  share, 
has  this  day  paid  into  the  treas- 
ury of  said  corporation  to  be  ap- 
plied on  account  of  said  subscrip- 
tion, the  sum  of  $ ,same 

being  an  installment  of  $ 

per  share. 

IT  is  MUTUALLY  AGREED  between 
the  holder  hereof,  and  THE  JOHN 
DOE  ELECTRIC  Co.,  that  the  issu- 
ance of  said  shares  of  stock  is 
subject  to  the  conditions  of  the 
said  subscription,  and  that  the 
regular  stock  certificates  of  said 
corporation  are  not  to  be  issued 
thereunder,  until  the  first  day  of 
June,  A.  D.,  1908;  and  that  upon 
the  payment  of  the  remaining  in- 
stallments of  said  subscription  in 


Date, 


APPENDIX. 


215 


accordance  with  its  terms,  and 
the  due  surrender  of  this  certifi- 
cate, such  regular  stock  certifi- 
cate will,  upon  said  first  day  of 
June,  1908,  be  duly  issued  to  the 
said  subscriber  or  his  assignee. 

Dated  at  Chicago,  111.,  this 

day  of ,  1907. 


Treasurer. 


[CoRPOEATE  SEAL.] 
Attest: 


Secretary. 


216  APPENDIX. 


ASSIGNMENT  OF  THE  FOKEGOING  INSTALLMENT  CERTIF- 
ICATE, AND  THE  SUBSCRIPTION  UNDER  WHICH  THE 
SAME  is  ISSUED. 

FOE  VALUE  EECEIVED hereby  sell,  assign  and 

transfer  unto all  my  rights, 

title  and  interest  in  and  to  the  subscription  heretofore 

made  by  me  to shares  of  the  capital  stock  of  THE 

JOHN  DOE  ELECTRIC  Co.,  together  with  the  payment 
made  thereon,  as  evidenced  by  the  within  installment 
certificate. 

This  assignment  and  transfer  is  made  upon,  and  in 
accordance  with,  the  terms  and  conditions  of  my  said 
subscription,  and  is  subject  to  the  conditions  thereof; 
and  I  do  hereby  authorize  and  instruct  the  duly  author- 
ized officers  of  said  corporation  to  issue  the  stock  sub- 
scribed for  by  me,  to  the  order  of  my  said  assignee  on 
the  first  day  of  June,  A.  D.  1908,  upon com- 
pliance with  all  the  conditions  of  my  said  subscription 
and  the  due  surrender  of  this  certificate. 

Dated  at this day  of A.  D.  190. . 

[SEAL.] 

Witness 


APPENDIX.  217 


BY-LAWS 

OF 

THE  JOHN  DOE  ELECTRIC  CO. 
AETICLE  I. 

BOARD  OF  DIRECTORS. 

Sec.  1.  The  Board  of  Directors  of  this  Company 
shall  consist  of  five  (5)  stockholders,  who  shall  hold 
their  respective  offices  for  one  (1)  year,  and  until  their 
successors  are  elected. 

ARTICLE  II. 

OFFICERS. 

Sec.  1.  The  officers  of  this  company  shall  consist 
of  a  President,  a  Vice  President,  a  Secretary  and  a 
Treasurer,  and  such  other  officers  and  agents  as  shall. 
from  tune  to  time,  be  deemed  necessary  by  the  Board 
of  Directors. 

Sec.  2.  Such  officers  shall  hold  their  respective 
offices  for  the  period  of  one  (1)  year  following  their 
election,  and  until  their  successors  are  elected,  and  with 
salary,  if  any,  as  shall  be  provided  by  the  directors. 

Sec.  3.  Any  officer  may  be  removed  by  the  Board 
of  Directors,  when,  in  their  judgment,  the  interests  of 
the  company  so  requires. 


218  APPENDIX. 

ARTICLE  III. 
STOCKHOLDERS'  MEETINGS. 

Sec.  1.  The  annual  meeting  of  the  Stockholders  of 
this  company  shall  be  held  at  its  principal  office  in 
Chicago  on  the  second  Tuesday  of  May  of  each  year  at 
the  hour  of  three  o'clock  p.  M. 

Sec.  2.  A  notice  of  such  meeting,  giving  the  day 
and  the  hour  thereof,  shall  be  signed  by  the  secretary, 
and  mailed  to  each  stockholder  of  record  as  the  stock- 
holder's address  appears  on  the  books  of  the  com- 
pany, or  so  far  as  the  same  are  known  to  the  secre- 
tary, at  least  ten  (10)  days  before  said  meeting  day. 

Sec.  3.  Any  business  may  be  transacted  at  such  an- 
nual meeting  without  specifying  the  same  in  the  notice 
therefor. 

Sec.  4.  The  president,  or  any  two  (2)  members  of 
the  Board  of  Directors,  may  call  special  meetings  of  the 
stockholders  of  this  company,  which  shall  be  held  at 
the  general  office  of  the  company  in  Chicago,  or  at 
such  other  place,  in  the  City  of  Chicago,  and  at  such 
hours,  as  the  president  or  such  directors  may  deter- 
mine; and  a  notice,  briefly  stating  the  subjects  which 
will  come  before  such  special  meeting,  shall  be  mailed 
to  each  stockholder  at  his  last  known  address,  at  least 
five  (5)  days  before  the  time  for  holding  said  meetings. 

ARTICLE  IV. 

MEETINGS  OF  BOARD  OF  DIRECTORS. 

Sec.  1.     The  regular  annual  meeting  of  the  Board  of 
Directors  of  this  company  shall  be  held  on  the  second 


APPENDIX.  219 

Tuesday  of  May,  at  the  office  of  the  company  in 
Chicago,  immediately  after  the  annual  stockholders' 
meeting. 

Sec.  2.  Three  (3)  of  the  Board  of  Directors  shall 
constitute  a  quorum  for  the  transaction  of  any  business 
at  any  meeting. 

Sec.  3.  The  president  of  this  company  may  call 
special  meetings  of  the  Board  of  Directors  whenever 
he  may  deem  it  necessary  so  to  do. 

Sec.  4.  The  secretary  shall,  upon  the  request  of  the 
president,  mail  postpaid  to  the  address  of  each  di- 
rector, so  far  as  the  same  appears  on  the  company's 
books,  a  notice  of  all  special  directors'  meetings  and 
shall  specify  briefly  therein,  the  subjects  that  will 
come  before  the  meeting,  at  least  five  (5)  days  before 
such  meeting  day. 

Sec.  5.  No  business  shall  be  transacted  at  any 
special  directors'  meeting,  except  that  specified  in  the 
notice  or  call  therefor. 

AKTICLE  V. 

OKDEB  OF  BUSINESS  AT  ALL  MEETINGS. 

Sec.  1.  The  order  of  business  at  all  meetings  of  the 
Board  of  Directors  and  Stockholders,  shall  be  as 
follows : 

First— Eoll  call. 

Second — Eeading  minutes  of  last  meeting. 

Third — Considering  communications  to  the  Board 
or  Stockholders. 


220  APPENDIX. 

Fourth — Eeports  of  officers  to  the  Board  or  Stock- 
holders. 

Fifth — Unfinished  business. 

Sixth — Original  resolutions  and  new  business. 

AKTICLE  VI. 

THE  PRESIDENT. 

Sec.  1.  The  president  shall  preside  over  all  meet- 
ings of  the  Board  of  Directors  and  Stockholders,  at 
which  he  may  be  present. 

Sec.  2.  In  the  absence  of  the  president  at  any  di- 
rectors '  meetings,  the  vice  president  shall  be  the  acting 
president  for  such  meetings. 

Sec.  3.  In  case  the  office  of  treasurer  and  that  of 
president  of  this  company  shall  be  filled  by  different 
persons,  then  all  notes  and  bonds,  or  other  evidences 
of  indebtedness,  shall  be  countersigned  by  the  presi- 
dent. 

Sec.  4.  The  fact  that  a  director  presides  as  presi- 
dent or  chairman  of  any  meeting  of  the  Board  of  Di- 
rectors, or  stockholders,  shall  not  prevent  his  voting, 
the  same  as  though  he  were  not  president  or  chairman. 

ARTICLE  VII. 

VICE  PRESIDENT. 

Sec.  1.  The  vice  president  of  the  company  shall 
take  an  active  part  in  the  conduct  of  the  business,  and 
his  duties  and  responsibilities  shall  be  determined, 
from  time  to  time,  by  the  Board  of  Directors. 


APPENDIX. 


221 


Sec.  2.  In  the  absence  of  the  president  at  any  di- 
rectors '  meetings,  or  in  his  absence  from  the  city  for 
any  protracted  period,  the  vice  president  shall  be  the 
acting  president. 

ARTICLE  VIII. 

THE  SECEETAEY. 

Sec.  1.  The  secretary  of  the  company  shall  attend 
all  meetings  of  the  stockholders  and  directors  when 
practicable ;  in  his  absence  a  secretary  pro  tern,  or  act- 
ing secretary  shall  be  appointed. 

Sec.  2.  The  secretary  shall  keep  a  correct  record 
of  the  proceedings  of  the  Board  of  Directors  and  of 
the  stockholders  in  the  corporate  record  book  of  the 
company,  and  he  shall  perform  such  other  duties,  from 
time  to  time,  as  the  Board  of  Directors  may  designate 
by  resolution. 

Sec.  3.  The  secretary  shall  countersign  all  checks 
drawn  upon  the  funds  of  this  company. 

ARTICLE  IX. 

THE   TREASURER. 

Sec.  1.  The  treasurer  shall  keep  the  moneys  of  the 
company  in  such  bank,  or  banks,  as  may  be  designated 
by  the  Board  of  Directors;  the  deposit  account  shall 
be  kept  in  the  name  of  the  corporation. 

Sec.  2.  He  shall  sign  all  checks,  drafts,  notes,  or 
other  evidences  of  indebtedness,  for  and  on  behalf  of 
the  company,  and  have  full  charge  of  its  financial 


222  APPENDIX. 

affairs,  subject,  however,  to  the  direction  of  the  Board 
of  Directors. 

Sec.  3,  All  checks  drawn  by  the  treasurer  shall  be 
countersigned  by  the  secretary  before  they  are  issued. 

Sec.  4.  The  treasurer  shall  take  an  active  part  in 
the  conduct  of  the  business,  and  his  duties  and  respon- 
sibilities shall  be  determined,  from  time  to  time,  by  the 
Board  of  Directors. 

ARTICLE  X. 

ANNUAL  REPORTS. 

Sec.  1.  It  shall  be  the  duty  of  all  officers  of  the  cor- 
poration to  make  full  and  complete  written  reports  to 
the  Board  of  Directors  annually,  on  the  second  Tues- 
day of  May  in  each  year,  of  all  matters  pertaining  to 
their  respective  offices,  and  the  board  may  require 
any  officer  of  the  corporation,  at  any  time,  to  make 
such  reports,  touching  the  business  of  his  office,  as  they 
shall  deem  necessary. 

ARTICLE  XI. 

CHECKS,  DRAFTS,  MORTGAGES  AND  BONDS. 

Sec.  1.  All  checks  and  drafts  shall  be  signed  in  the 
company's  name  by  the  treasurer,  and  countersigned 
by  the  secretary. 

Sec.  2.  In  case  the  office  of  treasurer  and  that  of 
president  of  this  company  shall  be  filled  by  different 
persons,  then  all  notes,  bonds  or  other  evidences  of  in- 
debtedness, shall  be  countersigned  by  the  president,  be- 
fore they  are  issued. 


APPENDIX.  223 

Sec.  3.  In  case  of  the  issuing  of  any  mortgages  or 
bonds  on  the  plant  or  property  of  the  company,  it  shall 
not  be  necessary  to  the  validity  thereof;  that  authority 
be  obtained  from  the  stockholders ;  the  directors  of  the 
company  shall  have  full  power,  right  and  authority  to 
pledge  the  plant  and  assets  of  the  company  to  raise 
necessary  working  funds  therefor ;  or  to  secure  any  ex- 
isting debts. 

AKTICLE  XII. 

CERTIFICATES  OF  STOCK. 

Sec.  1.  All  certificates  of  stock  shall  be  signed  by 
the  president  and  secretary,  and  attested  by  the  seal 
of  the  company. 

Sec,  2.  Capital  stock  shall  be  transferable  only  on 
the  books  of  the  corporation,  upon  return  and  delivery 
of  the  certificate  so  transferred,  duly  endorsed;  the 
secretary  shall  cancel  the  same  and  issue  a  new  certi- 
ficate or  certificates  to  the  assignee. 

Sec.  3.  No  person  shall  be  entitled  to  vote  at  any 
meeting  of  the  stockholders,  unless  his  ownership  of 
stock  shall  appear  on  the  books  of  the  company  on 
the  first  day  of  the  month  preceding  the  time  of  such 
meeting,  except  in  case  of  executors  or  administrators. 

Sec.  4.  Any  stockholder  may  vote  by  proxy,  duly 
authorized  in  writing  and  presented  and  filed  with  the 
secretary. 

Sec.  5.  In  case  of  loss  or  destruction  of  stock  cer- 
tificates by  the  owners  thereof,  new  certificates  may 
only  be  issued  upon  such  terms  and  conditions  as  the 
Board  of  Directors  may  impose. 


224  APPENDIX. 

AKTICLE  XIII. 

SALARIES. 

Sec,  1.  No  salaries  of  any  kind  shall  be  paid  to  or 
claimed  by  any  officer  of  this  company,  (as  such)  unless 
the  amount  of  such  salary  is  fixed  and  provided  for  by 
order  or  resolution  of  the  Board  of  Directors,  adopted 
prior  to  the  performance  of  the  services  in  question 
and  recorded  in  the  minute  book  of  the  company. 

ARTICLE  XIV. 

VACANCIES. 

Sec.  1.  Vacancies  in  any  of  the  offices,  or  in  the 
Board  of  Directors  may  be  filled,  by  the  directors  of 
this  Company  for  the  un expired  term,  at  any  regular 
or  special  meeting  of  the  Board. 

Sac.  2.  In  the  absence  or  disability  of  any  officer 
or  agent,  the  directors  may,  if  they  see  fit,  appoint  in 
his  stead  an  acting  officer  or  agent  who  shall  perform 
the  duties  of  his  office,  during  such  absence  or  disa- 
bility, under  the  directions  of,  and  to  be  governed  by 
the  Board  of  Directors. 

ARTICLE  XV. 

ADDRESSES. 

.Sec.  1.  It  shall  be  the  duty  of  each  stockholder, 
officer  and  director  to  inform  the  secretary  of  his  post- 
office  address,  and  of  any  change  in  the  same;  and  it 
shall  be  the  duty  of  the  secretary  to  keep  a  book  of 
such  addresses. 


APPENDIX.  225 

Sec.  2.  Notices,  mailed  post  paid,  to  the  addresses 
so  given  shall  be  deemed  sufficient  notice  for  any  and  all 
purposes. 

ARTICLE  XVI. 

DIVIDENDS. 

Sec.  1.  Dividends  may  be  declared  from  the  profits 
of  the  company,  at  such  times,  and  in  such  amounts,  as 
the  Board  of  Directors  shall,  from  time  to  time,  deem 
proper. 

ARTICLE  XVII. 

CORPORATE  SEAL. 

Sec,  1.  It  shall  be  the  duty  of  the  Board  of  Direc- 
tors, at  their  first  meeting,  to  adopt  a  corporate  seal 
for  the  corporation;  and  to  affix  an  impression  of  the 
same  upon  the  record  book  of  the  corporation  opposite 
this  article. 

ARTICLE  XVIII. 

AMENDMENTS. 

Sec.  1.  These  by-laws,  or  any  of  them,  may  be 
altered,  amended,  or  repealed  at  any  regular  or  spe- 
cial meeting  of  the  Board  of  Directors,  and  at  such 
meetings  new  by-laws  may  be  added ;  provided  thirty 
(30)  clays  written  or  printed  notice  shall  be  given  to  all 
stockholders  of  any  such  intended  alteration,  amend- 
ment or  repeal. 


226  APPENDIX. 

Adopted,  this  16th  day  of  May,  1907. 

JOHN  DOE, 
RICHARD  ROE, 
WILLIAM  SMITH, 
HENRY  BROWN, 
JAMES  JOHNSON, 
Attest: 

HENRY  JONES, 

Secretary. 


APPENDIX. 


227 


FOKM  OP  ASSIGNMENT  OF  INVENTION  BEFOEE  PATENT. 
(From  " Rules  of  Practice,"  U.  S.  Patent  Office.) 

WHEREAS,  I,  John  Jones,  of  Chicago,  in  the  County 
of  Cook,  and  State  of  Illinois,  have  invented  a  certain 
new  and  useful  improvement  in  electric  engines,  for 
which  I  am  about  to  make  (or  have  heretofore  on  the 

day  of  A.  D.  190 made) 

application  for  Letters  Patent  of  the  United  States;* 

AND  WHEREAS,  William  Smith  of  Chicago,  County 
of  Cook,  State  of  Illinois,  is  desirous  of  acquiring  an 
interest  in  the  said  invention  and  in  the  Letters  Patent 
to  be  obtained  therefor; 

Now,  THEREFORE,  To  all  whom  it  may  concern,  be  it 
known  that,  for  and  in  consideration  of  Five  Thousand 
Dollars,  to  me  in  hand  paid,  the  receipt  of  which  is 
hereby  acknowledged,  I,  the  said  John  Jones,  have 
sold,  assigned  and  transferred,  and  by  these  presents 
do  sell,  assign  and  transfer  unto  the  said  William 
Smith  the  full  and  exclusive  right  to  the  said  invention, 
as  fully  set  forth  and  described  in  the  specification  pre- 
pared and  executed  by  me  on  the  5th  day  of  March, 
1907,  preparatory  to  obtaining  Letters  Patent  of  the 
United  States  therefor ;  and  I  do  hereby  authorize  and 
request  the  Commissioner  of  Patents  to  issue  the  said 
Letters  Patent  to  the  said  William  Smith,  as  the  as- 
signee of  my  entire  right,  title  and  interest  in  and  to 
the  same,  for  the  sole  use  and  behoof  of  the  said 
William  Smith  and  his  legal  representatives. 

•If  application   for  Letters  Patent  have   been   made,  give  number  of  ap- 
plication, as  v.eil  as  date. 


228  APPENDIX. 

IN  TESTIMONY  WHEREOF,  I  have   hereunto    set   my 
hand,  and  affixed  my  seal,  this  25th  day  of  June,  1907. 

JOHN  JONES.     [SEAL.] 
In  the  presence  of 

HARRY  WILLIAMS. 


APPENDIX.  229 


FORM  OF  ASSIGNMENT  OF  UNDIVIDED  INTEREST  IN  LET- 
TERS PATENT. 

(From  "Bules  of  Practice,"  U.  S.  Patent  Office.) 
WHEREAS,  I,  John  Jones,  of  Chicago,  County  of 
Cook,  and  State  of  Illinois,  did  obtain  Letters  Patent 
of  the  United  States,  for  an  improvement  in  electric 
engines,  which  Letters  Patent  are  numbered  *  *  * 
and  bear  date  the  30th  day  of  June,  in  the  year  1907 ; 
and  whereas  William  Smith,  of  Chicago,  County  of 
Cook,  and  State  of  Illinois,  is  desirous  of  acquiring  an 
interest  in  the  same: 

Now,  THEREFORE,  To  all  whom  it  may  concern,  be  it 
known  that,  for  and  in  consideration  of  the  sum  of 
One  Thousand  ($1,000)  Dollars,  to  me  in  hand  paid, 
the  receipt  of  which  is  hereby  acknowledged,  I,  the  said 
John  Jones,  have  sold,  assigned  and  transferred,  and 
by  these  presents  do  sell,  assign  and  transfer  unto  the 
said  William  Smith  the  undivided  one-half  part  of  the 
whole  right,  title,  and  interest  in  and  to  the  said  in- 
vention, and  in  and  to  the  Letters  Patent  therefor 
aforesaid ;  the  said  undivided  one-half  part  to  be  held 
and  enjoyed  by  the  said  William  Smith  for  his  own 
use  and  behoof,  and  for  the  use  and  behoof  of  his  legal 
representatives,  to  the  full  end  of  the  term  for  which 
said  Letters  Patent  are  or  may  be  granted,  as  fully  and 
entirely  as  the  same  would  have  been  held  and  en- 
joyed by  me  had  this  assignment  and  sale  not  been 
made. 

IN  TESTIMONY  WHEREOF,  I  have   hereunto    set   my 


230  APPENDIX. 

hand,  and  affixed  my  seal,  at  Chicago,  in  the  County  of 
Cook,  and  State  of  Illinois,  this  6th  day  of  July,  A.  D. 
1907. 

JOHN  JONES.     [SEAL.] 
In  presence  of 

HAEEY  WILLIAMS. 


APPENDIX.  231 

FOBM  OF  ASSIGNMENT  OF  ENTIKE  INTEREST  IN  PATENT. 
(From  " Rules  of  Practice,"  U.  S.  Patent  Office.) 

WHEREAS,  John  Jones,  of  Chicago,  in  the  County  of 
Cook,  and  State  of  Illinois,  did  obtain  Letters  Patent, 
of  the  United  States,  for  an  improvement  in  electric 
engines,  which  Letters  Patent  are  numbered    * 
and  bear  date  the  30th  day  of  June,  in  the  year  1907 ; 

AND,  WHEREAS,  I  am  now  the  sole  owner  of  said 
patent,  and  of  all  rights  under  the  same ;  and,  whereas, 
THE  JOHN  DOE  ELECTRIC  Co.  (a  corporation  of  Illi- 
nois), of  Chicago,  County  of  Cook,  State  of  Illinois, 
is  desirous  of  acquiring  the  entire  interest  in  the 
same: 

Now,  THEREFORE,  To  all  whom  it  may  concern,  be  it 
known  that,  for  and  in  consideration  of  the  sum  of 
ten  thousand  dollars,  to  me  in  hand  paid,  the  receipt  of 
which  is  hereby  acknowledged,  I,  the  said  John  Jones, 
have  sold,  assigned  and  transferred,  and  by  these  pres- 
ents, do  sell,  assign  and  transfer,  unto  the  said,  THE 
JOHN  DOE  ELECTRIC  Co.,  the  whole  right,  title  and  in- 
terest in  and  to  the  said  improvements  in  Electric  En- 
gines and  in  and  to  the  Letters  Patent  therefor  afore- 
said; 

The  same  to  be  held  and  enjoyed  by  the  said  THE 
JOHN  DOE  ELECTRIC  Co.,  for  its  own  use  and  behoof, 
and  for  the  use  and  behoof  of  its  legal  representatives, 
to  the  full  end  of  the  term  for  which  said  Letters 
Patent  are  or  may  be  granted,  as  fully  and  entirely  as 


!232 


APPENDIX. 


the  same  would  have  been  held  and  enjoyed  by  me  had 
this  assignment  and  sale  not  been  made. 

IN  TESTIMONY  WHEREOF,  I  have  hereunto  set  my 
hand  and  affixed  my  seal,  at  Chicago,  in  the  County  of 
Cook,  and  State  of  Illinois,  this  18th  day  of  May  A.  D. 
1907. 

JOHN  JONES.       [SEAL.] 
Signed,  sealed  and  delivered  in  presence  of 

WILLIAM  SMITH. 


APPENDIX.  233 

FORM  OF  COAL  OPTION, 
With  Deferred  Payments: 

THIS  AGREEMENT,  Made  and  entered  into  this 

day  of 190 ,  between 

of County, ,  party  of 

the  first  part,  and of , 

party  of  the  second  part : 

WITNESSETH,  That  the  party  of  the  first  part  in  con- 
sideration of  one  dollar  ($1.00)  and  other  good  and 

valuable  considerations  to in  hand  paid 

by  the  said  party  of  the  second  part,  the  receipt  of 
which  is  hereby  acknowledged,  does  hereby  grant  and 
sell  unto  said  party  of  the  second  part,  his  heirs  or 
assigns,  the  exclusive  right,  or  option,  for  the  period 
of months  from  the  date  hereof,  to  pur- 
chase at  the  price  and  upon  the  terms  hereinafter 
stated,  all  the  coal  and  mineral  lying  and  being  under 
the  surface  of  the  following  described  real  estate  situ- 
ate in County, to-wit: 


the  said  above  described  real  estate  containing 

acres  of  land,  more  or  less. 

Said  party  of  the  second  part  hereby  agrees  that  he 
will,  within  30  days  after  like  options  are  obtained  on 
at  least  1,000  acres  of  coal  near  or  adjacent  to  said 
premises  above  described,  begin  drilling,  and  then 


234  APPENDIX. 

cause  to  be  put  down  upon  or  in  the  neighborhood  of 
the  above  described  real  estate,  one  or  more  drillholes 
for  the  purpose  of  ascertaining  and  testing  the 
amount  and  quality  of  coal  that  may  be  found  in  said 
vicinity;  and,  that  as  soon  as  said  drilling  shall  be 
completed,  and  it  is  thereby  demonstrated  to  the  satis- 
faction of  the  said  party  of  the  second  part,  that  coal 
of  sufficient  thickness  and  quality  underlies  said  above 
described  premises,  then  and  in  that  event,  said  party 
of  the  second  part  hereby  agrees  to  pay  for  said  coal 
above  described  at  the  price  hereinafter  mentioned,  in 
the  following  manner,  to-wit:  First — to  pay  to  the 
party  of  the  first  part  one  quarter  of  the  purchase 
price  in  cash;  Second — to  give  to  the  said  party  of 
the  first  part  his  promissory  note  for  one  quarter  of 
the  purchase  price  of  said  coal ;  Third — to  give  to  the 
said  party  of  the  first  part  his  promissory  note  for  one- 
half,  or  the  balance,  of  the  purchase  money,  said  notes 
to  be  payable  to  the  order  of  said  party  of  the  first 
part  on  or  before  one  and  two  years,  respectively, 
after  the  date  thereof,  with  interest  at  the  rate  of  6% 
per  annum,  and  the  same  to  be  secured  by  a  mortgage 
in  the  usual  form  upon  said  coal  and  premises  above 
described. 
And  the  party  of  the  first  part  hereby  agrees  at  or 

before  the  expiration  of months  from  the 

date  hereof,  to  convey  to  the  said  party  of  the  second 
part,  his  heirs,  legal  representatives  or  assigns,  by  a 
good  and  sufficient  WARRANTY  DEED  accompanied  by  a 
merchantable  abstract,  brought  down  to  date,  at  and 

for  the  price  of dollars  per  acre,  to  be  paid 

by  said  party  of  the  second  part  in  the  manner  herein- 
before mentioned,  all  the  coal  and  mineral  lying  under 


APPENDIX.  235 

said  above  described  premises,  together  with  the 
right  to  mine,  dig  and  remove  the  same  therefrom, 
and  together  with  the  right  to  use  all  entries  under 
said  premises  for  the  purpose  of  hauling,  mining  and 
removing  coal  from  any  other  lands  near  or  adjacent 
to  the  above  described  premises. 

And  under  the  continuance  of  this  option  the  party  of 
the  first  part  hereby  grants  to  the  party  of  the  second 
part  the  right  of  ingress  and  egress  over  said  prem- 
ises for  the  purpose  of  prospecting  and  drilling  for 
coal  on  said  premises,  and  the  right  to  erect  such 
structure  or  structures  as  are  necessarily  incident  to 
the  carrying  out  of  said  work,  and  hereby  releases  said 
party  of  the  second  part  from  all  claims  for  damages 
which  may  arise  upon  account  of  said  drilling  and 
prospecting,  except  damage  to  growing  crops  (if  any), 
for  which  said  second  party  agrees  to  pay  a  just  com- 
pensation. 

Said  party  of  the  first  part  further  agrees  to  sell  to 
said  party  of  the  second  part,  his  heirs,  or  assigns, 
at  any  time  within  one  year  after  the  purchase  of  said 
coal  as  aforesaid,  such  portion  of  the  surface  of  said 
premises  as  may  be  desired  for  the  erection  of  tipples, 
buildings,  power  houses,  railroad  tracks  and  switches 
and  other  improvements  for  the  mining,  removal  and 
transportation  of  said  coal  (not  to  exceed  30  acres, 

however)  at  the  price  of dollars  per  acre,  and 

to  convey  the  title  to  said  surface  to  said  party  of  the 
second  part,  his  heirs,  legal  representatives  or  assigns, 
by  a  good  and  sufficient  WAKKANTY  DEED,  accompanied 
by  a  merchantable  abstract  therefor. 

It  is  further  agreed  that  no  shaft  shall  be  sunk  or 
railroad  built  within  five  hundred  (500)  feet  of  any 


236  APPENDIX. 

important  building  now  standing  upon  said  premises 
and  owned  by  the  party  of  the  first  part,  except  by 
special  contract  hereafter  secured. 

Said  first  party  further  agrees  that  if  said  party  of 
the  second  part  shall  be  drilling  and  testing  said  prem- 
ises or  premises  adjacent  thereto  at  the  time  of  the 
.expiration  of  this  option,  to  then  extend  the  time 
thereof  for  a  period  of  sixty  days  from  the  date  of  the 
expiration  hereof. 


IN  WITNESS  WHEREOF,  we  herein  bind  ourselves,  our 
heirs,  legal  representatives  and  assigns,  and  have 
affixed  our  hands  and  seals  the  day  and  year  first  above 
written. 

[SEAL.] 

[SEAL.] 

[SEAL.] 

[SEAL.] 

STATE  OF ,  ) 

Vss. 
County  of ,  ) 

I, a  Notary  Public  in  and  for 

said  county,  in  the  state  aforesaid,  DO  HEREBY  CERTIFY 
That 

personally  known  to  me  to  be  the  same  person 

whose  name subscribed  to  the  foregoing 

instrument,  appeared  before  me  this  day  in  person, 

and  acknowledged  that he signed,  sealed 

and  delivered  the  said  instrument  as free 

and  voluntary  act,  for  the  uses  and  purposes  therein 


APPENDIX.  237 

set  forth,  including  the  release  and  waiver  of  the  right 
of  homestead. 

GIVEN  under  my  hand  and  notarial  seal,  this 

day  of A.  D.  190 


Notary  Public. 


238  APPENDIX. 


FOEM  OP  COAL  OPTION, 

Payments  To  Be  Made,  Either  in  Whole  or  Part,  with 
Stock  of  the  Corporation  To  Be  Formed  for  the 
Development  of  the  Field  Optioned : 

THIS  AGKEEMENT,  Made  and  entered  into  this 

day  of 190 ,  between 

of County, ,  party  of 

the  first  part,  and of , 

party  of  the  second  part: 

WITNESSETH,  That  the  party  of  the  first  part  in  con- 
sideration of  one  dollar  ($1.00)  and  other  good  and 

valuable  considerations  to in  hand  paid 

by  the  said  party  of  the  second  part,  the  receipt  of 
which  is  hereby  acknowledged,  does  hereby  give,  grant, 
sell  and  convey  unto  said  party  of  the  second  part,  his 
heirs,  or  assigns,  the  exclusive  right,  privilege,  or 

option,  for  the  period  of months  from  the 

date  hereof,  to  purchase  all  the  coal  and  mineral  lying 
and  being  under  the  surface  of  the  following  described 
real  estate  situate  in County, ,  to-wit : 


(said  above  described  real  estate  containing 

acres  of  land,  more  or  less)  at  and  for  the  price  of 

$ per  acre,  to  be  paid  as  follows,  viz:  

dollars  in  cash,  and  the  balance  of  said  pur- 


APPENDIX. 


239 


chase  money  to  be  paid  in  Cumulative  1%  Preferred 
stock  of  the  Mining  Corporation  which  shall  be  formed 
for  the  purpose  of  taking  over  said  coal  above  described, 
and  the  balance  of  the  field  of  at  least  1,000  acres  lying 
near  or  adjacent  to  said  coal,  and  for  the  mining  and 
removal  of  the  same.  It  being  understood  and  agreed 
that  said  corporation  above  referred  to,  shall  be  organ- 
ized under  the  laws  of and  have  a  capital  stock 

of  $200,000.00,  the  same  to  be  equally  divided  into 
Cumulative  1%  Preferred  and  Common  stock,  said 
preferred  stock  to  have  all  the  rights  and  privileges 
of  the  common  stock. 

Said  party  of  the  second  part  hereby  agrees,  that  he 
will,  within  30  days  after  options  are  obtained  on  at 
least  1,000  acres  of  coal  near  or  adjacent  to  the  prem- 
ises above  described,  begin  drilling,  and  then  cause  to 
be  put  down  upon  or  in  the  neighborhood  of  the  above 
described  real  estate,  one  or  more  drill  holes  for  the 
purpose  of  ascertaining  and  testing  the  amount  and 
quality  of  coal  that  may  be  found  in  said  vicinity ;  and 
that  as  soon  as  said  drilling  shall  be  completed,  and  it 
is  thereby  demonstrated  to  the  satisfaction  of  the  said 
party  of  the  second  part,  that  coal  of  sufficient  thick- 
ness and  quality  underlies  said  above  described  prem- 
ises, then  and  in  that  event,  said  party  of  the  second 
part  agrees  to  pay  for  said  coal  above  described  at  the 
price  and  in  the  manner  above  set  forth. 

And  the  party  of  the  first  part  further  agrees  at  or 

before  the  expiration  of months  from  the 

date  hereof  to  convey  unto  the  party  of  the  second 
part,  his  heirs,  legal  representatives,  or  assigns,  by 
good  and  sufficient  WAKEANTY  DEED,  accompanied  by  a 
merchantable  abstract,  brought  down  to  date,  at  and 


240  APPENDIX. 

for  the  price  of dollars  per  acre,  to  be  paid 

by  said  party  of  the  second  part  in  the  manner  herein- 
before mentioned,  all  the  coal  and  mineral  lying  under 
said  premises,  together  with  the  right  to  mine,  dig  and 
remove  the  same  therefrom,  together  with  the  right  to 
use  all  entries  under  said  premises  for  the  purpose  of 
hauling,  mining  and  removing  coal  from  other  lands 
near  or  adjacent  to  the  above  described  premises. 

And  under  the  continuance  of  this  option  the  party 
of  the  first  part  hereby  grants  to  the  party  of  the  sec- 
ond part,  the  right  of  ingress  and  egress  over  said 
premises  for  the  purpose  of  prospecting  and  drilling 
for  coal  on  said  premises,  and  the  right  to  erect  such 
structure  or  structures  as  are  necessarily  incident  to 
the  carrying  out  of  said  work,  and  hereby  releases  said 
party  of  the  second  part  from  all  claims  for  damages 
which  may  arise  upon  account  of  said  drillings  and 
prospecting,  except  damage  to  growing  crops  (if  any), 
for  which  said  second  party  agrees  to  pay  a  just  com- 
pensation. 

Said  party  of  the  first  part  further  agrees  to  sell 
to  said  party  of  the  second  part,  his  heirs,  or  assigns, 
at  any  time  within  one  year  after  the  purchase  of  said 
coal  as  aforesaid,  such  portion  of  the  surface  of  said 
premises  as  may  be  desired  for  the  erection  of  tipples, 
buildings,  power  houses,  railroad  tracks  and  switches 
and  other  improvements  for  the  mining,  removal  and 
transportation  of  said  coal  (not  to  exceed  30  acres, 

however),  at  the  price  of dollars  per  acre, 

and  to  convey  the  title  to  said  surface  to  the  party  of 
the  second  part,  his  heirs,  legal  representatives  or  as- 
signs, by  a  good  and  sufficient  WAKKANTY  DEED,  accom- 
panied by  a  merchantable  abstract 


APPENDIX.  241 

It  is  further  agreed  that  no  shaft  shall  be  sunk  or 
railroad  built  within  five  hundred  (500)  feet  of  any 
important  building  now  standing  upon  said  premises 
and  owned  by  the  party  of  the  first  part,  except  by 
special  contract  hereafter  secured. 

Said  first  party  further  agrees  that  if  said  party  of 
the  second  part  shall  be  drilling  and  testing  said  prem- 
ises or  premises  adjacent  thereto  at  the  time  of  the 
expiration  of  this  option,  to  then  extend  the  time 
thereof  for  a  period  of  sixty  days  from  the  date  of  the 
expiration  hereof. 


IN  WITNESS  WHEKEOF,  we  herein  bind  ourselves,  our, 
heirs,  legal  representatives  and  assigns,  and  have 
affixed  our  hands  and  seals  the  day  and  year  first  above 
written. 

.. [SEAL.] 

[SEAL.] 

[SEAL.] 

[SEAL.] 

STATE  OF ,  ) 

County  of ,  j  SS' 

I, a  Notary  Public  in  and  for 

said  county,  in  the  state  aforesaid,  DO  HEKEBY  CEKTIFY 
That 

personally  known  to  me  to  be  the  same  person 

whose  name subscribed  to  the  foregoing 

instrument,  appeared  before  me  this  day,  in  person, 
and  acknowledged  that he signed,  sealed 


242  APPENDIX. 

and  delivered  the  said  instrument  as free 

and  voluntary  act,  for  the  uses  and  purposes  therein 
set  forth,  including  the  release  and  waiver  of  the  right 
of  homestead. 

GIVEN  under  my  hand  and  notarial  seal,  this 

day  of..,..s A.  D.  190 


Notary  Public. 


APPENDIX. 


243 


'STOCKHOLDER'S  PEOXY. 


Know  All  Men  By  These  Presents : 

That  the  undersigned  being  the  owner  of  record  of 
Fifty  shares  of  the  capital  stock  of  The  John  Doe  Elec- 
tric Co.,  of  Chicago,  do  hereby  make,  constitute  and  ap- 
point Eichard  Eoe,  of  Chicago,  my  true  and  lawful 
attorney  for  me  and  in  my  name,  place  and  stead,  to 
attend  the  annual  meeting  of  the  stockholders  of  said 
corporation  to  be  held  at  333  Plymouth  Ave.,  in  the 
City  of  Chicago,  on  the  fifth  day  of  May,  A.  D.  1908,  or 
at  any  adjournment  thereof,  and  to  represent  me,  and 
for  me  and  in  my  name  and  stead  to  vote  at  said  meet- 
ing upon  the  said  shares  of  stock  standing  in  my  name, 
upon  any  and  all  questions  that  may  be  presented 
thereat,  and  in  the  transaction  of  any  other  business 
which  may  come  before  said  meeting,  or  any  adjourn- 
ment thereof,  as  fully  as  I  could  do  if  personally 
present  at  the  doing  thereof,  and  I  hereby  ratify  and 
confirm  all  that  my  said  attorney  may  do  by  virtue 
hereof. 

IN  WITNESS  WHEREOF,  I  have  hereunto  set  my  hand 
and  seal  this  first  day  of  May,  1908. 

WILLIAM  SMITH.     [SEAL.] 
Witness, 

HENRY  JAMES. 


APPENDIX.  245 


RULES  GOVERNING  THE  LIST 

OF 

STOCKS  AND  BONDS 

ON  THE 

CHICAGO  STOCK  EXCHANGE. 
"ARTICLE  XIX. " 

"APPLICATION  TO  PLACE  STOCKS,  ETC.,  ON  THE  LIST." 

"Sec.  1.  All  applications  for  placing  securities  on 
the  regular  list  shall  be  made  to  the  Committee  on 
Stock  List  in  writing,  and  signed  by  the  parties  desir- 
ing to  have  the  securities  listed. " 

"Sec.  2.  If  a  stock,  the  application  must  state  the 
amount  of  authorized  capital,  which  in  every  case 
must  not  be  less  than  $200,000,  the  par  value  of  shares, 
the  number  of  shares  issued,  whether  dividend  pay- 
ing, and  if  so,  time  and  place  of  dividend,  the  address 
of  the  transfer  office  or  offices,  the  amount  of  funded 
or  floating  debt,  etc.,  all  of  which  must  be  certified  to 
by  the  officers  with  the  seal  of  the  company  attached." 

"Sec.  3.  If  a  bond  or  loan,  the  application  must 
state  the  amount  authorized,  which  in  every  case  must 
not  be  less  than  $200,000,  the  amount  outstanding, 
when  due,  percentage  of  interest,  when  and  where 
payable,  whether  taxable,  whether  guaranteed,  and  by 
whom,  name  of  trustee,  if  any,  etc." 


246  APPENDIX. 

"Sec.  4.  If  the  Stock  List  Committee  approve  the 
application,  they  shall  report  to  the  Governing  Com- 
mittee for  final  action. " 

"Sec.  5.  A  charge  of  one  hundred  dollars  will  be 
made  in  all  cases  for  listing  either  stock  or  bonds,  to 
be  paid  to  the  secretary  of  the  Exchange  before  the  se- 
curity shall  be  placed  upon  the  official  list  of  the  Ex- 
change.7' 

"Sec.  6.  All  applications  for  placing  securities  on 
the  unlisted  list  shall  be  made  in  writing  by  a  member 
of  the  Exchange,  and  after  approval  by  the  Stock  List 
Committee,  shall  be  submitted  to  the  Governing  Com- 
mittee, and  if  approved  by  the  latter  committee  shall 
be  placed  upon  said  list  without  charge. ' ' 

"ARTICLE  XX." 
"REGISTRY  OF  STOCKS." 

"The  Exchange  will  not  call  or  deal  in  any  active 
speculative  stock  of  any  company,  a  registry  of  whose 
stock  is  not  kept  in  some  responsible  bank  or  trust 
company,  or  other  satisfactory  agency,  and  which 
shall  not  give  public  notice  at  the  time  of  establishing 
such  registry  of  the  number  of  shares  so  entrusted  to 
be  registered,  and  which  shall  not  give  at  least  thirty 
days'  notice  through  the  newspapers,  and  in  writing  to 
the  President  of  the  Exchange,  of  any  intended  in- 
crease of  the  number  of  shares,  either  direct  or 
through  the  issue  of  convertible  bonds,  and  which  shall 
not  at  the  same  time,  give  notice  of  the  object  for 
which  such  issue  of  stocks  or  bonds  is  to  be  made." 


APPENDIX.  247 


SYNOPSIS  OF  THE  CORPORATION  LAWS 

of  the  States  of 
New  Jersey,  Delaware,  Maine  and  South  Dakota* 

NEW  JEKSEY. 

Business  corporations  are  created  only  under  a 
"General  Act." 

They  are  given  the  following  special  powers :  Suc- 
cession by  its  corporate  name,  etc.;  hold,  purchase  or 
convey  real  estate  and  personal  property,  not  ex- 
ceeding, however,  the  amount  limited  in  its  charter; 
to  consolidate  with,  or  to  hold  stock  or  securities  in 
other  corporations  doing  the  same  or  similar  busi- 
ness, etc.,  and  generally  to  do  and  perform  any  law- 
ful act  usually  incident  to  such  corporate  bodies. 

They  may  be  formed  for  any  lawful  purpose,  by 
three  or  more  persons,  and  the  provisions  for  regulat- 
ing the  business,  or  defining  the  powers  of  the  com- 
pany, or  its  directors  and  stockholders,  may  be  incor- 
porated in  its  certificate  of  incorporation. 

Business  corporations  of  this  state  may  conduct 
business  in  other  states  or  foreign  countries,  and  have 
offices  outside  of  this  state,  but  must  maintain  their 
" principal  office "  within  the  state;  they  may  purchase 
stock  of  any  other  corporation,  or  property,  and  issue 
their  own  stock  in  payment;  and  such  stock  is  re- 
garded as  fully  paid,  when  adequate  value  is  received 
therefor. 


248  APPENDIX. 

Stock  may  be  paid  in  installments,  except  $1,000, 
the  minimum  with  which  a  corporation  can  begin  busi- 
ness; upon  the  payment  of  such  installment  of  the 
capital  stock,  the  law  provides  that  the  officers  must 
sign  and  file  with  the  department  of  state,  a  certificate 
showing  the  amount  of  the  capital  paid  in  and  how; 
that  is,  whether  it  has  been  paid  in  property  or  money. 
Such  corporations  must  have  at  least  three  directors, 
and  one  of  them  must  be  an  actual  resident  of  the 
state. 

The  president,  secretary  and  treasurer  may  be 
chosen  by  the  stockholders  or  the  directors,  as  the 
by-laws  may  provide,  but  they  must  be  elected  an- 
nually. 

The  president  must  be  one  of  the  directors. 

The  stock  transfer  books  are  required  to  be  kept  at 
the  company's  office  in  the  state,  but  other  books  may 
be  kept  outside  the  state. 

Stockholders  may  vote  by  proxy. 

There  is  no  stockholders'  liability  beyond  the 
amount  of  the  face  value  of  their  stock. 

Stockholders'  meetings  must  be  held  at  the  princi- 
pal office  of  the  corporation  in  this  state;  and  a  ma- 
jority in  interest  constitutes  a  quorum. 

The  directors'  meetings  may,  however,  be  held  out- 
side of  the  state,  if  the  by-laws  or  certificate  of  in- 
corporation so  permits. 

Corporations  may  hold,  purchase,  mortgage,  and 
convey  real  and  personal  property  outside  of  the 
state,  provided  such  powers  are  included  in  the  ob- 
jects of  the  company. 


APPENDIX.  249 

Directors  may  also  be  elected  annually;  and  if  it  is 
provided  for  in  the  original  certificate  of  incorpora- 
tion, the  directors  may  be  classified  so  as  to  elect  a 
given  class  for  different  terms;  but  the  term  of  one 
class  must  expire  each  year,  and  no  class  of  directors 
can  be  elected  for  more  than  five  years. 

Corporations  must  file  with  the  Secretary  of  State, 
within  thirty  days  after  the  first  election  of  directors 
and  officers  (and  annually  thereafter,  within  thirty 
days  after  the  time  appointed  for  holding  the  annual 
election  of  directors),  a  report  stating  facts  consti- 
tuting compliance  with  the  law,  such  as  the  number 
and  addresses  of  its  officers  and  directors,  etc.;  the 
location  of  the  company's  principal  office  in  this 
state;  the  name  of  its  representative  or  agent  in 
charge  of  its  office,  upon  whom  legal  process  against 
the  corporation  can  be  served. 

FEES  FOB  INCORPORATING:  There  must  be  paid  to 
the  Secretary  of  State  at  the  time  of  incorporating, 
not  less  than  twenty-five  dollars,  i.  e.,  for  any  corpo- 
ration whose  authorized  capital  does  not  exceed  one 
hundred  and  twenty-five  thousand  dollars,  and 
twenty  cents  per  one  thousand  for  each  additional  one 
thousand  dollars  of  capital  authorized. 

There  is  an  annual  franchise  tax  on  corporations. 

DELAWARE. 

Business  corporations  are  created  only  under  a 
"General  Act." 

They  are  given  the  following  special  powers:  Suc- 
cession by  its  corporate  name,  etc.;  to  hold,  purchase 


250  APPENDIX. 

or  convey  real  estate  and  personal  property;  to 
guarantee  purchase,  hold,  assign,  pledge,  etc.,  stocks 
and  bonds  of  other  corporations,  etc.;  and  generally 
to  do  and  perform  any  lawful  act  usually  incident  to 
such  corporate  bodies. 

They  may  be  formed  for  any  lawful  purpose  by 
three  or  more  persons,  and  the  provisions  for  regulat- 
ing the  business,  or  defining  the  powers  of  the  com- 
pany, or  its  directors  and  stockholders,  may  be  incor- 
porated in  its  certificate  of  incorporation. 

Business  corporations  of  this  state  may  conduct 
business  in  other  states  or  foreign  countries,  and  have 
offices  outside  of  this  state,  but  must  maintain  their 
"principal  office "  within  the  state;  stock  subscrip- 
tions may  be  paid  in  money,  property  or  services; 
and  the  statutes  provide  that,  in  the  absence  of  actual 
fraud,  the  directors'  valuation  is  conclusive. 

There  may  be  different  classes  of  stock,  and  it  may 
be  paid  in  installments  (except  $1,000,  which  is  the 
minimum  with  which  a  corporation  can  begin  busi- 
ness). 

Every  corporation  must  have  at  least  three  direct- 
ors, and  one  of  them  must  be  an  actual  resident  of 
the  state. 

The  president,  secretary  and  treasurer  may  be 
chosen  by  the  stockholders  or  the  directors,  as  the  by- 
laws may  provide,  and  they  hold  office  until  their 
successors  are  elected. 

The  president  must  be  one  of  the  directors. 

The  stock  transfer  books  are  required  to  be  kept  at 


APPENDIX.  251 

the  company's  office  in  the  state,  but  other  books  may 
be  kept  outside  the  state. 

Stockholders  may  vote  by  proxy. 

Stockholders  may  limit  their  liability  to  the  amount 
of  the  face  value  of  their  stock. 

Stockholders'  meetings  must  be  held  at  the  princi- 
pal office  of  the  corporation  in  this  state,  unless  the 
by-laws  otherwise  provide. 

The  directors'  meetings  may  be  held  outside  of  the 
state,  if  the  by-laws  permit. 

Corporations  may  hold,  purchase,  mortgage,  and 
convey  real  and  personal  property  outside  of  the 
state,  providing  such  powers  are  included  in  the  ob- 
jects of  the  company,  and  they  may  consolidate  with 
other  corporations. 

Directors  must  also  be  elected  annually;  and  if  it 
is  provided  for  by  resolution  of  the  stockholders,  the 
directors  may  be  classified  so  as  to  elect  a  given  class 
for  different  terms;  but  the  term  of  one  class  must 
expire  each  year,  and  no  class  of  directors  can  be 
elected  for  more  than  three  years. 

Annual  reports  are  required,  and  upon  the  written 
request  of  any  creditor  or  stockholder,  corporations 
must  file  with  the  Secretary  of  State,  within  thirty 
days  after  such  request  being  made,  a  certificate  stat- 
ing the  amount  of  money  or  property  paid  or  con- 
veyed to  the  corporation  on  account  of  the  stock  sub- 
scriptions, and  the  amount  of  capital  stock  then 
issued  and  outstanding,  etc. ;  and  if  they  fail  to  comply 
with  such  request,  the  officers,  whose  duty  it  is  to  pre- 


252  APPENDIX. 

pare  such  statement,  shall  be  jointly  and  severally 
liable  with  the  corporation  for  all  debts. 

FEES  FOB  INCORPORATING: 
Certificate  of  Incorporation. 
For  each  $1,000  of  the  total  capital  stock  author- 
ized   $    .10 

For  each  $1,000  of  the  total  capital  stock  author- 
ized, above  $2,000.000 $  .05 

In  no  case  less  than $10.00 

Certificate  of  Increase. 

And  for  each  $1,000  of  increase  of  capital  stock, 
additional  (but  in  no  case  less  than  $5.00) $    .10 

Certificate  of  Agreement  of  Consolidation  or  Merger. 

For  each  $1,000  of  capital  stock  of  new  company, 
over  and  above  the  total  capital  stock  of  the 
companies  so  consolidated  or  merged $  .10 

Certificate  of  Dissolution. 

Change  of  name,  amended  certificate  of  organiza- 
tion, decrease  of  capital  stock  and  increase 

or  decrease  of  number  of  shares $10.00 

Other  certificates $  5.00 

There  is  a  franchise  tax  on  corporations,  propor- 
tionate to  amount  of  the  authorized  capital  stock. 

MAINE. 

Business  corporations  are  created  only  under  a 
"General  Act." 

They  are  given  the  following  special  powers:  Suc- 
cession by  its  corporate  name,  etc.;  to  hold,  purchase 


APPENDIX.  253 

or  convey  real  estate  and  personal  property;  to  own 
or  hold  stock  in  other  corporations,  etc. ;  and  generally 
to  do  and  perform  any  lawful  act  usually  incident  to 
corporate  bodies. 

Corporations  may  be  formed  for  any  lawful  pur- 
pose, by  three  or  more  persons,  none  of  whom  need 
be  residents  of  this  state. 

Corporations  of  this  state  may  conduct  business 
in  other  states  or  foreign  countries,  and  have  offices 
outside  of  this  state,  but  must  maintain  their  "princi- 
pal office "  within  the  state;  stock  subscriptions  may 
be  paid  in  money,  property  or  services;  and  the  Act 
says  that,  in  the  absence  of  actual  fraud,  the  direct- 
ors' valuation  is  conclusive,  but  a  decision  of  the  State 
Supreme  Court  makes  this  provision  doubtful. 

Stock  may  be  paid  in  installments,  and  there  is  no 
minimum  with  which  a  corporation  may  start  busi- 
ness. 

Bonds  may  be  issued  and  payable  in  installments. 
(See  1907  Amendment.) 

Every  corporation  must  have  at  least  three  direct- 
ors, none  of  whom  are  required  to  be  actual  residents 
of  the  state,  but  they  must  all  be  stockholders. 

The  president,  clerk,  secretary  and  treasurer  may 
be  chosen  by  the  stockholders  or  the  directors,  as  the 
by-laws  may  provide  and  they  hold  office  until  their 
successors  are  elected. 

The  president  must  be  one  of  the  directors. 

Stock  transfer  books  are  required  to  be  kept  at  the 
company's  office  in  the  state,  but  other  books  may  be 
kept  outside  the  state. 


254  APPENDIX. 

Stockholders  may  vote  by  proxy,  granted  within 
thirty  days  of  the  meeting. 

Stockholders  may  limit  their  liability  to  the  amount 
of  the  face  value  of  their  stock. 

Stockholders'  meetings  must  be  held  at  the  princi- 
pal office  of  the  corporation  in  this  state,  unless  the 
by-laws  otherwise  provide. 

The  directors'  meetings  may  be  held  outside  of  the 
state,  if  the  by-laws  permit. 

Corporations  may  hold,  purchase,  mortgage,  and 
convey  real  and  personal  property  outside  of  the  state, 
providing  such  powers  are  included  in  the  objects  of 
the  company. 

Directors  must  also  be  elected  annually;  and  if  it  is 
provided  for  by  resolution  of  the  stockholders,  the 
directors  may  be  classified  so  as  to  elect  a  given  class 
for  different  terms. 

The  1907  legislature  provided  for  annual  reports  to 
be  made  similar  to  those  now  required  in  Illinois,  and 
for  a  failure  so  to  do,  the  charter  to  become  "  sus- 
pended. " 

FEES  FOE  INCOKPOBATING :  About  twenty-five  dol- 
lars for  state  fees  and  for  recording  certificates,  etc., 
for  all  corporations  with  capitalization  of  ten  thou- 
sand dollars  or  less;  and  fifty  dollars  when  the  same 
exceeds  ten  thousand  dollars,  and  up  to  and  including 
five  hundred  thousand  dollars ;  and  ten  dollars  for  each 
hundred  thousand  dollars  in  excess  of  five  hundred 
thousand  dollars;  besides  there  are  several  other 
fees  provided  by  statute  for  recording,  etc.,  amounting 
to  some  twenty  dollars. 


APPENDIX.  255 

There  is  an  annual  franchise  tax,  as  follows  (Laws 
of  1907) : 

"  Every  corporation  incorporated  under  the  laws  of 
the  state,  except  such  as  are  excepted  by  section 
twenty-six  of  chapter  forty-seven,  shall  pay  an  annual 
franchise  tax  of  five  dollars,  provided  the  authorized 
capital  of  said  corporation  does  not  exceed  fifty  thou- 
sand dollars,  of  ten  dollars,  provided  said  authorized 
capital  exceeds  fifty  thousand  dollars,  and  does  not 
exceed  two  hundred  thousand  dollars;  of  fifty  dol- 
lars, provided  said  authorized  capital  exceeds  two 
hundred  thousand,  and  does  not  exceed  five  hundred 
thousand  dollars;  of  seventy-five  dollars,  provided 
said  authorized  capital  exceeds  five  hundred  thousand 
dollars,  and  does  not  exceed  one  million  dollars;  and 
the  further  sum  of  fifty  dollars  a  year  for  each  one 
million  dollars,  or  any  part  thereof,  in  excess  of  one 
million  dollars. " 

SOUTH  DAKOTA. 

Business  corporations  are  created  only  under  a 
"General  Act." 

They  are  given  the  following  special  powers: 
Eight  of  succession  by  its  corporate  name;  voting  by 
proxy;  forfeiture  of  stock  for  non-payment;  holding, 
purchase  or  convey  real  estate  (for  the  needs  of  its 
business)  and  personal  property  in  or  outside  of 
state,  etc.,  and  generally  to  do  and  perform  any  law- 
ful act  usually  incident  to  such  corporate  bodies. 
Corporations  may  be  formed  for  any  lawful  purpose, 
by  three  or  more  persons;  one-third  of  such  incorpo- 
rators  must  be  residents  of  this  state. 

Corporations  of  this  state  may  conduct  business  in 


256  APPENDIX. 

' 

other  states  or  foreign  countries,  and  have  offices  out- 
side of  this  state;  but  must  maintain  a  "domiciliary 
office "  within  the  state. 

Stock  may  be  paid  in  installments,  in  money, 
property  or  services. 

Every  corporation  must  have  at  least  three  direct- 
ors, and  not  more  than  eleven. 

The  president,  secretary  and  treasurer  may  be 
chosen  by  the  stockholders  or  the  directors,  as  the  by- 
laws may  provide,  and  one  of  such  officers  or  one  of 
the  directors  must  be  a  resident  of  the  state. 

The  president  must  be  one  of  the  directors. 

Stockholders  may  vote  by  proxy. 

Stockholders  are  only  liable  to  the  amount  of  their 
unpaid  stock  subscriptions  (except  for  labor  claims), 
and  this  liability  is  not  discharged  by  transfer  of 
stock. 

Stockholders'  meetings  may  be  held  at  an  office  of 
the  corporation  in  this  state,  or  elsewhere,  as  the  by- 
laws provide,  and  a  majority  in  interest  constitutes  a 
quorum. 

The  directors'  meetings  may  be  held  outside  of  the 
state,  if  the  certificate  of  incorporation  so  provides. 

Directors  must  be  elected  annually. 

Annual  reports  are  provided  for;  and  stockholders 
representing  twenty  per  cent,  of  the  stock  issued,  may 
require  a  special  report  at  any  time. 


APPENDIX.  257 

FEES  FOR  INCORPORATING. 

Authorized   capital   stock  of $  25,000  or  less  $  10.00 

Over  $25,000  and  not  exceeding  100,000  35.00 

Over  $100,000  and  not  exceeding  500,000  20.00 

Over  $500,000  and  not  exceeding    1,000,000  30.00 

Over  $1,000,000  and  not  exceeding   1,500,000  40.00 

Over  $1,500,000  and  not  exceeding   2,000,000  50.00 

Over  $2,000,000  and  not  exceeding    2,500,000  60.00 

Over  $2,500,000  and  not  exceeding   3,000,000  70.00 

Over  $3,000,000  and  not  exceeding   3,500,000  80.00 

Over  $3,500,000  and  not  exceeding    4,000,000  90.00 

Over  $4,000,000  and  not  exceeding   4,500,000  100.00 

Over  $4,500,000  and  not  exceeding    5,000,000  110.00 

Over  $5,000,000    150.00 

For  appointment  of  Resident  Agent 5.00 

For  certified  copies,  25c  per  folio  of  100  words  and  $1.00  for  certificate. 

There  are  no  annual  franchise  or  other  fees. 

NOTE  :  As  the  corporation  laws  of  the  various  states  are  constantly 
undergoing  changes,  it  will  be  necessary  to  refer  to  the  laws  in  force  at 
the  time  of  inquiry,  in  order  that  accurate  information  may  be  obtained. 


258  APPENDIX. 


FOREIGN  CORPORATIONS. 

"Aisr  ACT  entitled  'An  act  to  regulate  the  admission 
of  foreign  corporations  for  profit,  to  do  business  in  the 
State  of  Illinois/  (Approved  May  18,  1905;  in  force 
July  1, 1905.) " 

' '  Section  1.  Be  it  enacted  by  the  People  of  the  State 
of  Illinois  represented  in  the  General  Assembly :  That 
before  any  foreign  corporation  for  profit  shall  be  per- 
mitted or  allowed  to  transact  any  business  or  exercise 
any  of  its  corporate  powers  in  the  State  of  Illinois, 
other  than  insurance  companies,  building  and  loan  com-, 
panies  and  surety  companies,  they  shall  be  required  to 
comply  with  the  provisions  of  this  act  and  shall  be 
subject  to  all  of  the  regulations  prescribed  herein,  as 
well  as  all  other  regulations,  limitations  and  restric- 
tions applying  to  corporations  of  like  character  organ- 
ized under  the  laws  of  this  state." 

' t  Sec.  2.  When  any  corporation  organized  under  the 
laws  of  any  foreign  state  or  country,  for  the  transac- 
tion of  business  for  profit,  desires  admission  into  the 
State  of  Illinois,  for  the  purpose  of  transacting  busi- 
ness or  exercising  its  corporate  powers  or  franchise 
it  shall  make  application  to  the  Secretary  of  State, 
signed  and  sworn  to  by  the  president  and  secretary, 
stating  what  business  such  corporation  proposes  to 
pursue  under  its  charter,  the  amount  of  capital  stock 
of  such  corporation,  whether  it  is  transacting  or  it  is 
intended  that  it  shall  transact  business  in  any  other 
state  or  country,  the  proportion  of  its  business  in- 
tended to  be  carried  on  in  the  State  of  Illinois,  the 
amount  paid  in  upon  its  capital  stock,  what  property 
and  assets  and  an  estimate  of  the  value  thereof,  will 
be  employed  in  the  business  of  said  corporation  in  the 
State  of  Illinois;  if  any  of  its  capital  subscribed  has 
not  been  paid  in  what  disposition  is  to  be  made  thereof, 


APPENDIX.  259 

the  names  of  the  president,  secretary  and  directors 
of  said  corporation  and  their  residences,  where  its  prin- 
cipal office  in  Illinois  will  be  located  and  the  name  and 
address  of  some  attorney  in  fact,  upon  whom  service 
can  be  had  in  all  suits  commenced  in  this  state  and,  if 
required  by  the  Secretary  of  State,  the  names  and 
residences  of  all  stockholders  in  said  corporation  as 
shown  by  its  records,  and  such  corporation  shall  file 
with  the  Secretary  of  State,  copy  of  its  charter  or 
articles  of  incorporation,  or  in  case  such  corporation 
is  incorporated  merely  by  a  certificate  then  a  copy  of 
its  certificate  of  incorporation  duly  certified  and 
authenticated  by  the  officer  who  issued  the  original, 
or  by  the  recorder  or  registrar  of  the  office  in  which 
said  original  charter,  articles  or  certificates  may  have 
been  recorded. ' ' 

"The  Secretary  of  State  shall  have  power  to  pre- 
scribe the  form  of  such  application  and  may,  in 
addition  thereto,  propound  such  interrogatory  or  inter- 
rogatories to  the  applicants  respecting  the  character 
of  the  business  in  which  said  corporation  proposes  to 
engage,  the  amount  of  its  capital  stock,  the  proportion 
of  its  business  that  it  is  intended  shall  be  carried  on 
in  this  state,  and  the  proportion  and  location  of  its 
business  in  other  states  or  countries,  and  such  inter- 
rogatories shall  be  answered  under  oath  and  the  inter- 
rogatories and  answers  thereto  shall  be  filed  with  said 
application  and  with  the  certified  copy  of  its  charter 
and  shall  be  and  operate  as  a  limitation  upon  the 
powers  of  said  corporation  to  transact  business  in  the 
State  of  Illinois." 

"The  Secretary  of  State,  upon  the  admission  of  such 
foreign  corporation  to  do  business  in  the  State  of 
Illinois,  shall  issue  a  certified  copy  of  all  papers,  in- 
cluding certified  copy  of  the  charter  of  said  corpora- 


260  APPENDIX. 

tion,  and  shall  state,  in  a  certificate  of  authority  to  do 
business  issued  by  him,  the  powers  and  object  of  said 
corporation  which  may  be  exercised  in  this  state,  not 
in  conflict  with  the  law  or  public  policy  of  this  state, 
and  no  corporation  shall,  by  the  certificate  of  the  Sec- 
retary of  State,  be  authorized  to  transact  any  business 
in  this  state  for  the  transaction  of  which  a  corporation 
cannot  be  organized  under  the  laws  of  this  state,  and 
no  foreign  corporation  shall  exercise  any  powers  in 
this  state  not  authorized  by  the  provisions  of  its 
charter. ' ' 

"Sec.  3.  Every  foreign  corporation  admitted  to  do 
business  in  the  State  of  Illinois  under  the  provisions 
of  this  act  shall  constantly  keep  on  file  in  the  office  of 
the  Secretary  of  State  an  affidavit  of  the  president 
and  secretary,  showing  the  location  of  its  principal 
business  office  in  the  State  of  Illinois,  and  the  name  of 
some  person  who  may  be  found  at  said  office,  for  the 
purpose  of  accepting  service  upon  said  corporation, 
in  all  suits  that  may  be  commenced  against  it,  and  as 
often  as  said  corporation  shall  change  the  location  of 
its  office,  or  its  attorney  for  receiving  and  accepting 
service,  a  new  affidavit  shall  be  filed  to  take  the  place 
of  all  such  affidavits  previously  filed  by  the  officers  of 
said  corporation.  Such  corporation  when  admitted  to 
do  business  in  the  State  of  Illinois,  under  this  act  shall 
be  required  to  make  such  reports  from  time  to  time 
as  are  required  to  be  made  by  similar  corporations 
organized  under  the  laws  of  this  state  and  all  regula- 
tions now  in  force  or  hereafter  imposed  upon  domestic 
corporations,  shall  be  alike  observed  and  complied 
with  by  all  foreign  corporations  doing  business  in  this 
state, " 

"No  foreign  corporation  admitted  to  do  business  in 
this  state  under  the  provisions  of  this  act  shall  hold 
any  real  estate  except  such  as  may  be  necessary  for 


APPENDIX.  261 

the  proper  carrying  on  of  its  legitimate  business,  nor 
be  permitted  to  mortgage,  pledge  or  encumber  its  real 
or  personal  property  situated  in  this  state  to  the  injury 
or  exclusion  of  any  citizen  or  corporation  of  this  state 
who  is  creditor  of  such  foreign  corporation  and  no 
mortgage  by  any  foreign  corporation,  except  railroad 
and  telegraph  companies,  given  to  secure  any  debt 
created  in  any  other  state  shall  take  effect  as  against 
any  citizen  or  corporation  of  this  state  until  all  of  its 
liabilities  due  any  person  or  corporation  of  this  state 
at  the  time  of  recording  such  mortgage,  shall  have  been 
fully  paid  and  extinguished.  Before  any  foreign  cor- 
poration shall  be  authorized  to  do  business  in  this 
state  it  shall  be  required  to  pay  into  the  office  of  the 
Secretary  of  State  upon  the  proportion  of  its  stock 
represented  by  its  property  and  business  in  Illinois, 
fees  equal  to  those  required  of  similar  corporations 
formed  within  and  under  the  laws  of  this  state. " 

*  *  *  "Sec.  5.  At  any  time  the  Secretary  of 
State  may,  in  his  discretion,  prepare  and  propound  to 
the  president,  secretary,  any  director  or  manager  of 
any  corporation  doing  business  in  this  state  under  the 
provisions  of  this  act,  such  interrogatories  respecting 
the  character  of  business  being  transacted  by  it,  the  lo- 
cation of  its  business,  the  names  and  residences  of  its 
directors  and  officers,  and  the  amount  of  capital  paid 
in,  as  well  as  what  disposition  has  been  made  of  capital 
stock  subscribed  for  or  authorized  and  not  paid  in, 
and  such  interrogatories  shall  be  answered  under  oath 
by  the  officer  or  director  to  whom  propounded,  within 
five  days  after  receipt  thereof,  and  upon  the  failure  or 
refusal  of  such  officer  or  director  to  fully  answer  such 
interrogatories  and  file  the  same,  with  his  answers,  in 
the  office  of  the  Secretary  of  State,  within  ten  days 
after  receiving  the  same,  the  Secretary  of  State  may 
revoke  the  authority  of  such  corporation  to  do  business 


262  APPENDIX. 

in  this  state,  by  filing  with  the  certified  copy  of  the 
charter  of  such  corporation  a  certificate  of  revocation, 
and  by  the  publication  thereof  for  one  issue  in  some 
newspaper  of  general  circulation  in  the  State  of 
Illinois,  and  thereafter  such  corporation  shall  not  exer- 
cise any  of  its  corporate  powers  or  franchises  in  the 
State  of  Illinois.  When  such  interrogatories  shall 
have  been  answered  and  filed  with  the  answers  thereto, 
in  the  office  of  the  Secretary  of  State,  if  thereby  any 
violation  of  the  law,  or  of  the  charter  of  said  corpora- 
tion, or  any  excess  of  its  powers  and  authority  to  do 
business  in  this  state  is  disclosed,  a  copy  thereof,  with 
such  information,  shall  be  immediately  transmitted  to 
the  Attorney  General  of  this  state  for  his  action." 

"Sec.  6.  Every  foreign  corporation  amenable  to 
the  provisions  of  this  act,  which  shall  neglect  or  fail 
to  comply  with  any  of  the  provisions  of  the  same  as 
herein  provided,  shall  be  subject  to  a  penalty  of  not 
less  than  one  thousand  dollars  ($1,000)  nor  exceeding 
ten  thousand  dollars  ($10,000),  to  be  recovered  before 
any  court  of  competent  jurisdiction,  and  it  is  hereby 
made  the  duty  of  the  Secretary  of  State,  as  he  may  be 
advised,  or  may  ascertain  that  any  corporation  is 
doing  business  in  contravention  of  this  act,  to  report 
such  fact  to  the  Attorney  General  of  this  state,  and  it 
shall  be  his  duty  and  the  duty  of  the  state's  attorney 
of  thf,  proper  county  to  bring  such  actions  at  law  as 
shall  be  necessary  for  the  recovery  of  the  penalties  im- 
posed hereby,  and  in  addition  to  such  penalty,  if  after 
this  act  shall  take  effect  any  foreign  corporation  shall 
fail  to  comply  herewith,  no  suit  may  be  maintained 
either  at  law  or  in  equity  upon  any  claim,  legal  or 
equitable,  whether  arising  out  of  contract  or  tort  in 
any  court  in  this  state." 


APPENDIX. 


263 


EARNINGS  ON  STOCKS  AND  BONDS. 

This  table  gives  the  approximate  earnings  on  Stocks  and  Bonds. 
As  an  illustration,  a  5%  stock  selling  at  90,  yields  5.56%.  By  look- 
ing down  the  5%  column  to  90  this  will  be  shown,  etc. 


Selling 
Price 

1% 

2% 

3% 

4% 

5% 

6% 

7% 

8% 

9% 

10% 

12% 

10 

10% 

20% 

30% 

~40% 

50% 

60% 

70% 

80% 

~W% 

100% 

120%" 

12% 

8. 

16. 

24 

32 

40. 

48. 

56. 

64. 

72  . 

80 

96 

15 

6.67 

13.33 

20.' 

26!  67 

33.33 

40. 

46.67 

53.33 

60. 

66^67 

80  '. 

17% 

5.71 

11.43 

17.14 

22.86 

28.57 

34.28 

40. 

45.71 

51.43 

67.14 

68.57 

20 

5. 

10. 

15. 

20. 

25. 

30. 

35. 

40. 

45. 

50. 

60. 

22% 

4.44 

8.89 

13.33 

17.78 

22.22 

26.67 

31.11 

35.56 

40. 

44.44 

53.33 

25 

4. 

8. 

12. 

16. 

20. 

24. 

28. 

32. 

36. 

40. 

48. 

27% 

3.64 

7.27 

10.91 

14.55 

18.18 

21.82 

25.45 

29.09 

32.73 

36.36 

42.64 

30 

3.33 

6  67 

10. 

13.33 

16.67 

20. 

23.33 

26.67 

30. 

33.33 

40. 

82% 

3.08 

6.15 

9.23 

12.31 

15.39 

18.46 

21.54 

24.62 

27.69 

30.77 

36.92 

35 

2.86 

5.71 

8.57 

11.43 

14.29 

17.14 

20. 

22.86 

25.71 

28.57 

34.29 

37% 

2.67 

5  33 

8. 

10.67 

13.33 

16. 

18.67 

21.33 

24. 

26.67 

32. 

40 

2.5 

5 

7.5 

10. 

12.5 

15. 

17.5 

20. 

22.5 

25. 

30. 

42% 

2.35 

4.70 

7.06 

9.41 

11.76 

14.12 

16.47 

18.82 

21.18 

23.53 

28.23 

45 

2.22 

4.44 

6.67 

8.89 

11.11 

13.33 

15.56 

17.78 

20. 

22.22 

26.67 

47% 

2.11 

4.21 

6.32 

8.42 

10.53 

12.63 

14.74 

16.84 

18.95 

21.05 

25.26 

50 

2. 

4. 

6. 

8. 

10. 

12. 

14. 

16. 

18. 

20. 

24. 

62% 

.90 

3.81 

5.71 

7.62 

9.52 

11.43 

13.38 

15.24 

17.14 

19.05 

22.86 

55 

.82 

3.63 

5.45 

7.27 

9.09 

10.91 

12.72 

14.55 

16.36 

18.18 

21.82 

67% 

.74 

3.48 

5.22 

6.96 

8.70 

10.43 

12.17 

13.91 

15.65 

17.39 

20.87 

60 

.67 

3.33 

5. 

6.67 

8.33 

10. 

11.67 

13.33 

15. 

16.67 

20. 

62% 

.6 

3.2 

.8 

6.4 

8. 

9.6 

11.2 

12.8 

14.4 

16. 

19.02 

65 

.54 

3.08 

.62 

6.15 

7.69 

9.23 

10.77 

12.31 

13.86 

15.38 

18.46 

67% 

.48 

2.96 

.44 

5.93 

7.41 

8.89 

10.37 

11.85 

13.33 

14.81 

17.78 

70 

.43 

2.86 

.29 

5.71 

7.14 

8.67 

10. 

11.43 

12.86 

14.29 

17.14 

72% 

.38 

2.76 

.14 

5.52 

6.90 

8.27 

9.65 

11.03 

12.41 

13.79 

16.55 

75 

.33 

2.67 

4. 

5.33 

6.67 

8. 

9.83 

10.67 

12. 

13.83 

16. 

77% 

.29 

2.58 

3.87 

5.16 

6.45 

7.74 

9.03 

10.32 

11.61 

12.90 

15.48 

80 

.25 

2.5 

3.75 

6. 

6.25 

7.5 

8.75 

10. 

11.25 

12.5 

15. 

82% 

.21 

2.42 

3.64 

<  .85 

6.06 

7.27 

8.48 

9.70 

10.91 

12.12 

14.54 

85 

.18 

2.35 

3.53 

.71 

5.88 

7.06 

8.24 

9.41 

10.69 

11.76 

14.12 

87% 

.14 

2.29 

3.43 

.57 

5.71 

6.86 

8. 

9.14 

10.29 

11.43 

13.71 

90 

.11 

2.22 

3.33 

.44 

5.56 

6.67 

7.78 

8.89 

10. 

11.11 

13.33 

92% 

.08 

2.16 

3.24 

.32 

5.41 

6.49 

7.57 

8.65 

9.73 

10.81 

12.97 

95 

.05 

2.11 

3.16 

.21 

5.26 

6.32 

7.37 

8.42 

9.47 

10.53 

12.63 

97% 

.03 

2.05 

3.08 

.10 

5.13 

6.15 

7.18 

8.21 

9.23 

10.26 

12.31 

100 

2 

3 

5. 

Q 

7. 

8. 

9 

10 

m 

105 

.95 

.90 

2.86 

3.81 

4.76 

5.71 

6.67 

7.62 

8.57 

9.52 

11.43 

110 

.91 

.82 

2.73 

8.64 

4.55 

5.45 

6.36 

7.27 

8.18 

9.09 

10.91 

115 

.87 

.74 

2.61 

3.48 

4.35 

5.22 

6.09 

6.96 

7.83 

8.70 

10.43 

120 

.83 

.67 

2.5 

3.83 

4.17 

6. 

5.83 

6.67 

7.6 

8.33 

10. 

125 

.8 

.6 

2.4 

3.2 

4. 

4.8 

5.6 

6.4 

7.2 

8. 

9.6 

130 

.77 

.54 

2.31 

3.08 

3.85 

4.62 

5.38 

6.16 

6.92 

7.69 

9.23 

135 

.74 

.48 

2.22 

2.96 

3.70 

4.44 

5.19 

5.93 

6.67 

7.41 

8.89 

140 

.71 

.43 

2.14 

2.86 

8.57 

4.29 

5. 

5.71 

6.43 

7.14 

8.67 

145 

.69 

.38 

2.07 

2.76 

8.45 

4.14 

4.83 

5.52 

6.21 

6.90 

8.28 

150 

.67 

.33 

2. 

2.67 

8.33 

4. 

4.67 

5.33 

6. 

6.67 

8. 

155 

.65 

.29 

1.94 

2.58 

3.23 

3.87 

4.52 

5.16 

5.81 

6.45 

7.74 

160 

.63 

.25 

1.87 

2.5 

8.12 

8.75 

4.37 

5. 

5.62 

6.25 

7.6 

165 

.61 

.21 

.82 

2.42 

8.03 

3.64 

4.24 

4.85 

5.45 

6.06 

7.27 

170 

.59 

.18 

.76 

2.35 

2.94 

3.53 

4.12 

4.71 

5.29 

5.88 

7.06 

175 

.57 

.14 

.71 

2.29 

2.86 

3.43 

4. 

4.57 

5.14 

6.71 

6.85 

180 

.56 

.11 

.67 

2.22 

2.78 

3.83 

3.89 

4.44 

5. 

5.56 

6.67 

185 

.54 

.08 

.62 

2.16 

2.70 

8.24 

3.78 

4.32 

4.86 

5.41 

6.49 

190 

.53 

.05 

.58 

2.11 

2.63 

3.16 

3.68 

4.21 

4.74 

5.26 

6.32 

195 

.51 

.03 

1.54 

2.05 

2.56 

8.08 

3.59 

4.10 

4.62 

5.13 

6.15 

200 

.5 

1.6 

2. 

2.5 

3. 

3.5 

4. 

4.5 

5. 

6. 

INDEX 


INDEX 

A 

PAGE 

ACCOUNTS, 

Books    of 98 

Examination  of 103 

How  to  Audit 103 

ADVANTAGES    OF    INCORPORATING 21 

AGREEMENTS, 

Between  Majority  Stockholders 92 

Legality    of 92 

ALTERATION  OF  RECORDS,  ETC 100 

AMOUNT   OF  CAPITALIZATION 27,  51 

APPRAISAL   OF  PROPERTY 34 

Illustration    202 

APPROVAL  OF  MINUTES  OF  MEETINGS 100 

ASSIGNMENT, 

Of  Commissioners'  Receipt  or  Subscription 213 

Of  Installment   Certificate 214 

Of  Patent 166,  229-231 

Of  Stock 92 

AUDIT  OF  ACCOUNTS  AND  RECORDS 103 

How  to  Accomplish 103 

B 

BONDS  (See  Capital,  Bonds  and  Stocks) 43 

Convertible  Into  Stock 50 

Capital  Obtained  by  Issue  of 176-193 

Sale   of 177 

Underwriting    150 

(267) 


268  INDEX. 

PAGE 

BONUS, 

Stock    as 63 

BOOKS, 

Corporate   Books 98,  103 

Inspection    of 86 

Minute    Book 98 

BUSINESS-BUILDING    19 

BUSINESS  CORPORATIONS, 

Distinguished  From  Mining 171 

BY-LAWS  AND  THEIR  USES 94 

Adoption    96 

Illustration 217 

C 

CAPITAL,  BONDS  AND  STOCKS, 

Defined  and  Distinguished 43 

CAPITALIZATION   OF  CORPORATIONS 51 

Mode   of 51 

Mining   Corporations 174 

Good  Will  as  Basis 158 

CAPITAL,   RAISING  ADDITIONAL 35-60-193 

CAPITAL  STOCK 43 

CERTIFICATE  OF  INCORPORATION, 

Filing    32 

CERTIFICATE  OF  STOCK, 

Assignment   of 43 

Common  Stock 46 

Negotiability  of 48 

Preferred    Stock 46 

CHARTER  (See  Certificate  of  Incorporation.) 

CHECKS, 

Protection  in  Issuing 222 


INDEX.  269 

PAGE 

CLASSIFICATION, 

Of   Directors 31 

Of  Stock 43-193 

COMMISSIONERS, 

Receipt,  Form  of 211 

COMMON  ERROR,  A 19 

COMMON  STOCK  (See  Capital,  Bonds  and  Stocks) 43 

CONSOLIDATION  OF  CORPORATIONS, 

Discussion    on 124 

CONSOLIDATION  OF  ENTERPRISES 124 

How    Accomplished 127 

CORPORATION,  AND  ITS  ADVANTAGES 21 

CORPORATE  FINANCING 43 

CORPORATE  MANAGEMENT 79 

CORPORATE  RECORDS  AND  BOOKS  OF  ACCOUNT 98 

CORPORATION, 

Defined    21 

How    Organized 24 

Where   to    Organize 36 

Advantages    of 21 

Books 98 

Formation    of 24 

Mining    Corporations 171 

COUNSEL,  Necessity  of 35,  176,  183,  190 

CONTRACTS, 

For  Underwriting  Stocks  and  Bonds 150 

To  Form  a  Corporation 190,  191,  197,  201 

CUMULATIVE  DIVIDENDS, 

Defined    46 

CUMULATIVE  VOTING, 

Explained    93 


270  INDEX. 

D 

PAGE 

DEBTS, 

Directors'    Liability    for 80 

Officers'    Liability    for 83 

Stockholders'   Liability   for 86 

DEEDS, 

Preparation  of 183 

Placed    in    Escrow 182 

DELAWARE, 

Synopsis  of   Corporation   Laws 249 

DEPRECIATION, 

See    Accounting,    etc 109 

DIRECTORS    AND    OFFICERS— THEIR    DUTIES    AND    LIA- 
BILITIES         79 

DISSOLUTION  OF  CORPORATION 128 

DIVIDENDS  (See  Capital,  Bonds  and  Stocks) 43 

Liability  for  Unlawful  Payment 80,  86,  91,  117 

Table  of 263 

DURATION, 

Of   Corporate   Existence 27 

E 
EARNINGS, 

Capitalization  Regulated  by 53,  159 

Table   of 263 

ELECTIONS, 

Directors  and  Officers 31 

ERROR,   A  COMMON 19 

EXAMINATION  OF  BOOKS  AND  RECORDS 112 

How  Accomplished 103 

EXCHANGE  OF  PROPERTY  FOR  STOCK, 

Plan  Illustrated 191,  194,  206,  209 


INDEX.  271 

F 

PAGE 

FEES  FOR  INCORPORATING, 

Delaware    252 

Maine    254 

New  Jersey 249 

South  Dakota 257 

FINANCING  ENTERPRISES 43,  60,  137,  191,  194 

FOREIGN  CORPORATIONS, 

Law    Regulating 37 

e.  g.   Illinois... 258 

FORMATION  OF  A  CORPORATION, 

How  to  Accomplish , 24 

FORMS   (See  Explanation  of) 189 

Appraisal  of  Property 208 

Assignment    of    Invention 227 

Assignment  of  Patent 231 

Assignment  of  Undivided  Interest  in  Patent 229 

Assignment  of   Installment  Certificate 216 

By-Laws 217 

Commissioners'    Receipt 211 

Contracts,  Genl.  and  Special 197,  201 

Commissioners'  Receipt,  Assignment  of 213 

Escrow  Agreement 183 

Installment    Certificate 214 

Option  Contract    (Cash  Plan) 233 

Option  Contract  (Stock  Plan) 238 

Proxy  to   vote 243 

Purpose   for   Coal   Company 178 

Reorganization    Certificate 206 

Resolution,  Ratifying,   etc 209 

FULLY  PAID  STOCK   (See  Capital,  Bonds  and  Stocks) 43 


272  INDEX. 


PAGE 

GOOD  WILL, 

Good  Will— Trademarks  and  Trade  Names 154 

How  Preserved 22,  72,  154 

How   Valued 159 

GUARANTEED  STOCK, 

Discussed    43,  152 

H 

HOW  TO  ORGANIZE  A  CORPORATION 24,  171,  195 

e.  g.  Illinois 24 

I 

ILLUSTRATIONS   (See  Explanation  of) 189 

Appraisal  of  Property 208 

Assignment  of  Invention 227 

Assignment  of  Patent 231 

Assignment  of  Undivided  Interest  in  Patent 229 

Assignment  of   Installment  Certificate 216 

By-Laws   .217 

Contracts,  Genl.  and  Special 197,  201 

Commissioners'    Receipt 211 

Assignment  of  Commissioners'  Receipt 213 

Escrow  Agreement 183 

Installment    Certificate 214 

Option  Contract   (Cash  Plan) 233 

Option  Contract  (Stock  Plan) 238 

Proxy  to  vote 243 

Purpose  for  Coal  Company 178 

Reorganization,  how  Accomplished 191,  192,  206 

Reorganization,    Mistakes    in 122 

Resolution,  Ratifying,  etc.... 209 


INDEX.  273 

PAGE 

INCREASE  OF  CAPITAL  STOCK, 

When    Advisable 60 

INSPECTION  OF  CORPORATE  BOOKS, 

Stockholders,  Right  to 112 

INSTALLMENT, 

Assignment  of  Rights 216 

Certificate    214 

Selling  Stock  on 58 

ISSUANCE  OF  STOCK  FOR  PROPERTY 69,  129,  158 

Inventory    73,  194 

L. 

LEADING  INCORPORATING  STATES 36 

LEASE    (See   Conveyance) 180 

LEGAL  ENTITY— CORPORATION  IS 21,     24 

LIABILITY, 

Of  Directors  and  Officers 79 

Of  Stockholders 86 

LIQUIDATION    (See    Dissolution) 127 

LISTING  OF  STOCKS  AND  BONDS 60 

e.  g.  Chicago  Stock  Exchange  Rules 245 

LOCATION   64,  121,  179 

M 
MAINE, 

Synopsis  of  Corporation  Laws 247 

MAJORITY  STOCKHOLDERS 90 

Rights  of   91 

MEETINGS, 

Records    of 29,  99 

To  Organize  Corporation 28 

MINING    ENTERPRISES 171 

Distinguished 171 


974  INDEX. 

PAGE 

MINORITY  STOCKHOLDERS, 

Rights    of 91,     92 

MINUTES, 

Amendment  of 101 

Approval    of 100 

Book  of 98 

MORTGAGE, 

Security  for  Bonds 49,  176 

N 

NAME   26 

Preservation    of 24,  192 

Trade    Name 154 

NEW  JERSEY, 

Synopsis  of  Corporation  Laws 247 

NOTICE, 

Of  First  Meeting,  in  Illinois 28 

Waiver  of  28,  29 

What  Constitutes,  to  Corporation 80 

NUMBER   OP   DIRECTORS 31 

O 

OFFICE  IN  OTHER  STATES  (See  Foreign  Corporation). 

OFFICERS, 

Liabilities  for  Salaries  Paid,  When,  etc 84 

Necessary    33 

Powers  of 79 

OPTIONS, 

Forms   of 233,  238 

Purpose  of  181 

OVER-ISSUED  STOCK, 

Denned    .  45 


INDEX.  275 


PAGE 

OVER-VALUATION  OF  PROPERTY, 

Liability  Therefrom 70,  87,  144,  173 

P 

PAR  VALUE, 

Stock  Should  Be  Issued  At 89 

PARTNERSHIP   (See  Advantages  of  Incorporating) 21 

PATENTS  (See  Patents  and  Their  Commercial  Value) 160 

ASSIGNMENT, 

Of  Invention  Before  Patent 227 

Of  Undivided  Interest 229 

Of  Whole,  After  Patent  Issues 231 

DEPRECIATING  "BOOK  VALUE"  OF  ASSETS 103 

PATENTABILITY, 

What    Constitutes 164 

U.  S.  Statute  Defining  Requisites 162 

PAYMENT  FOR  STOCK  IN  PROPERTY   (See  Over- Valuation 
of  Property). 

POWERS, 

How  Derived  27,  177 

PREFERRED  STOCK, 

Dividends    on 47 

Right  to  Issue 47 

Terms  and  Conditions  of 46 

PROMOTERS, 

Contracts  (See  Promotion  Contracts) 143 

Defined  and   Discussed 137 

PROMOTION  CONTRACTS, 

Observations   on 143 

PROMOTION   OF   ENTERPRISES 137 

PROXY— Right  to  Appoint 93 

Form  of   243 

PURPOSES    ,  27,  177 


276  INDEX. 

R 

PAGE 

RAISING  OP  ADDITIONAL  CAPITAL 35,  60,  191,  194 

RATIFICATION, 

Of  Acts  of  Officers,  etc 97 

RECEIPTS, 

Of  Commissioners  and  Trustees 211 

RECORDING, 

By-Laws    97 

Certificates  of  Incorporation 32 

Minutes 99 

REORGANIZATION— Possible  Advantages  Therefrom 115 

REORGANIZATION  CERTIFICATE, 

Illustration  and  Explanation 192,  206 

REPORTS, 

Annual    128 

Resolution  Ratifying  Commissioners,  etc 195,  209 

RESOLUTION, 

In  Accepting  Property,  etc 209 

Ratifying  Acts  of  Commissioners,  etc 209 

RIGHTS  OF  STOCKHOLDERS, 

Discussion  on 86 

S 

SALARIES, 

Of  Directors  and  Officers 83 

SALE, 

Of  Business 23,  72,  117,  191,  194 

Of  Bonds   60,  150,  194 

Of  Stock    60,   150,  194 

SECRETARY, 

(Custodian  of  Books  and  Records) 

Necessity    of 82 

SHARES  (See  Capital,  Bonds  and  Stocks). 


INDEX.  277 

PAGE 

SOUTH  DAKOTA, 

Synopsis  of  Corporation  Laws 255 

STOCK, 

Classification   and   Definition  of    (See   Capital,   Bonds   and 
Stocks). 

Listing  60,  194 

Underwriting    150 

STOCKHOLDERS'  RIGHTS  AND  LIABILITIES, 

Discussion  on &6 

STOCK-JOBBING    129 

SUBSCRIBER, 

To   Capital   Stock— Liability  of 87 

Subscription  28,  150,  190,  201 

T 
TABLE, 

Of  Earnings  of  Stocks  and  Bonds 263 

TRADEMARKS    155 

TRADE  NAME, 

Value  of... 71,  159 

TRANSFERRING  AN  ESTABLISHED  BUSINESS  TO  A  COR- 
PORATION         69 

TREASURER, 

Necessity  of 82 

U 
UNDERWRITING, 

Contracts  Relating  to 151 

Stocks  and  Bonds..  .  150 


278 


INDEX. 


PAGE 

VALUATION  OP  PROPERTY, 

Abuse  of  .........................  .....................  71,     87 

A  Safe  Rule  in  ..........................................     71 

Good  Will    ..............................................  159 

Mining  Property  Distinguished  ...........................  174 

VOTING, 

Cumulative    .............................................     93 

Proxies    .................................................     93 

W 
WATERED  STOCK, 

Defined    ..............................................  ...     45 

WHERE  TO  ORGANIZE, 

Subject  Discussed  .  .  ..........     36 


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